CII Recommends Capital Gains exemption on Transfer of Shares by Sponsor to REITs/InvITs

Exemp REITs/ InvITs from MAT and DDT at SPV level: CII

The Budget 2014-15 notified the norms where Real Estate Investment Trust (REITs)/ Infrastructure Investment Trust (InvITs) was provided the ‘pass through’ status for the purpose of taxation to attract long-term foreign and domestic investors. Later, SEBI had put in place the regulations for listing of new business trust structure that would help attract more funds in a transparent manner into the realty sector. However, much needs to be done on the tax structures of this instrument for it to become more efficient for domestic as well as overseas investors, stated CII in a press release issued here today.

For sponsors to structure REITs/ InvITs, there is a need to exchange shares in Special Purpose Vehicles (SPVs) with units of REITs/InvITs. Such exchange of shares is in reality not a commercial transaction as the stakeholders of shares of SPVs are the same as unit holders of REITs/InvITs. Hence, there is no sound basis of taxing such an exchange in the absence of real income. Finance (No. 2) Bill, 2014 proposed capital gain tax on capital gains arising to the Sponsor on sale of REITs units held by the Sponsor (post listing of units). The Bill proposed deferment of capital gains tax on capital gains arising at the time of exchange of shares in SPVs with units of the REITs, and taxing the capital gains at the time of disposal of units by the sponsor. Currently, Sponsors / Promoters of listed companies enjoy the benefit of long term capital gain tax exemption where STT is levied / paid. CII has recommended that long term capital gains tax should be exempted for sponsors of REITs/ Invits.

Mr Chandrajit Banerjee, Director General, CII mentioned that “as exchange of shares is being done only to initialize REITs/ InvITs with assets, therefore such gains should be exempt from Minimum Alternate Tax (MAT) as well as this act of exchange is not a transaction and therefore should not be treated as such.  There could be a potential MAT liability on such transfer, and CII has suggested for an exemption from the potential MAT liability also on such cashless transfers, since there is no change in the ultimate economic owner of the asset.”

Further, since REITs are required to mandatorily distribute almost the entire annual income as dividends to unit holders, the underlying SPV would necessarily have to suffer the dividend distribution tax (DDT) liability when it distributes income to the REIT. “This results in a multiple layer of tax, since the SPV would suffer this DDT levy in addition to corporate income tax on its taxable income. Outflow of Corporate Tax and DDT will bring down the earnings for distribution.  Hence, SPV should be exempt from DDT on dividend distributed to REITs/InvITs”, stated Mr Banerjee. CII recommended that DDT exemption is imperative on REITs/Invit to provide an effective tax structure and therefore, DDT exemption should be extended to SPVs where REITs hold the minimum stake as required by the regulations.

CII has said that easier taxation rules could provide a fillip to REITs as a lot of global capital is looking at new investment opportunities and business friendly regulations would help attract more funds in a transparent manner into the real estate sector.

Conditions Suitable for Substantial Rate Cut: CII President

Commenting on the WPI data that was released today, Mr Ajay S Shriram, President, CII said that “CII welcomes the steep fall in headline inflation, which has dropped to zero per cent in November as against 1.77 per cent growth evidenced in October owing to a broad-based decline in all sub-indices, which is significantly better than market expectations. What is also noteworthy is that both food and fuel prices have entered the negative terrain during the month. This data comes close on the heels of a drop in retail inflation to a low of 4.38% in November, thereby reaffirming the moderation of the inflation print which in turn would have a beneficial impact on inflationary expectations.”

CII has said that going forward, the continuing slowdown in global commodity prices as well as the government’s resolve to rein in the fiscal deficit would prevent prices from moving upwards. According to Mr Shriram, “this should induce the RBI to rethink its cautious monetary stance and urgently move towards a growth propelling monetary policy. The RBI should not wait till the next monetary policy announcement and reduce interest rate substantially, as industrial production is in the red and investment and consumption demand are yet to show visible signs of a pick-up.”

Culture, Commerce and Connectivity to be the hallmark of India’s relation to the CLMV Countries: Ms Nirmala Sitharaman

Culture, Commerce and Connectivity will be the hallmark of India’s relation to the CLMV Countries. This was stated by Ms Nirmala Sitharaman, Minister of State for Commerce & Industry, Government of India. The Minister was speaking at the 2nd India – CLMV Business Conclave, “ASEAN – India Economic Engagement: The Way Forward” organized by CII and the Department of Commerce, Ministry of Commerce and Industry here today.

 

 

 

According to the Minister, India’s Look East Policy had become more a more focused “Act East” Policy. There was now a greater stress on action and specific projects to help integrate with the Asian region.

The Minister mentioned that the threshold to the CLMV region was India’s North East and the government was taking steps to promote the development of this region as well as its connectivity to the CLMV countries.

The Minister pointed out that India-CLMV trade was concentrated in only a few items and there was tremendous scope to deepen and widen the trade basket. The Minister mentioned that several sectors hold potential for trade and investment between India and the CLMV countries. These included skill development, agricultural products, manufacturing, project exports, energy among others.

On the wider India – ASEAN relationship, the Minister mentioned that the government was aiming to increase India-ASEAN trade to $100 bn by 2015 and to double it to $200 bn by 2020. According to her, this would only be possible through greater connectivity with the region and this required improved road, rail and sea links. The Minister stated that the various infrastructure projects undertaken to improve connectivity were now under advanced stages of completion and the focus would now shift to the creation of soft infrastructure.

 

In his address, Mr Rajeev Kher, Commerce Secretary, Department of Commerce, Ministry of Commerce & Industry stated that India’s trade with the CLMV region amounted to USD 13 billion in 2013-14. Much of that trade, he observed, was with Vietnam. He felt that there was tremendous scope to expand trade relations with the other countries in the region.

Mr. Kher highlighted the need to establish regional and sub-regional value chains in order to maintain and sustain long-term economic relationship with the region. He stated that India industry could partner with businesses in the CLMV countries to reach out to newer markets. He felt that by joining forces, Indian and CLMV industry could take advantage of the trade agreement architecture that the CLMV countries have to access newer markets.

 

The Commerce Secretary stated that the Government was proposing to set up an SPV to promote investments by Indian business in CLMV region. According to him, Indian industry could take advantage of the Lines of Credit and Buyers Credit schemes to promote project exports into the CLMV countries.

According to Mr. Ajay Shriram, President, CII stated that connecting the CLMV countries with India can yield numerous benefits. These include larger markets can bring about economies of scale in production and enhance competitiveness. Integration of markets can facilitate the movement of production networks and attract more foreign direct investment (FDI) along with the benefits of knowledge and technology transfer and opportunities to connect to regional and global supply chains. He pointed out that sectors such as skill development, agricultural products, manufacturing, project exports, energy hold tremendous potential to boost trade and investment between India and the CLMV countries.

According to Mr Sanjay Kirloskar, Deputy Chairman, CII (Western Region) and Chairman & Managing Director, Kirloskar Brothers Ltd., India and CLMV, as fast developing Asian regional economies, were facing identical political and business environment in the region. The two regions would certainly benefit by cooperating with each other in the emerging global economic order.

Earlier, welcoming the participants, Mr. Chandrajit Banerjee, Director General, CII stated that Indian industry looks forward to adoption of Regional Comprehensive Economic Partnership,. He felt that this would help promote greater regional integratrion with ASEAN and in particular the CLMV countries.

Recovery in Manufacturing Growth Slow but Steady : CII ASCON Survey

   15% Manufacturing Growth Y-o-Y  an Imperative to Achieve a 10% Economic Growth : Amitabh Kant

The CII ASCON Survey for the July-September 2014 quarter was released at the CII Associations Council Meeting in New Delhi on 5^thDecember 2014.   The Survey for July-September 2014 quarter indicates that the economic growth has picked up with more number of sectors showing positive growth trends in the July-September quarter 2014 as compared to July-September 2013.  Although the expected growth resurgence is still elusive, industry feels that with government’s focused efforts to bolster investments in manufacturing, the growth is inevitable.

The CII ASCON Survey, which tracks the growth of industrial sector on a quarterly basis, based on feedback received from sectoral industry associations, shows that out of 59 sectors surveyed, the number of sectors reporting ‘excellent’ and high growth (>10 %) has shown an increase from 26.08% in 2013 to 30.4% in July-September 2014.   At the same time, number of sectors registering ‘low’ and ‘negative’ growth for July- September 2014 quarter has marginally gone down from 73.90% in 2013 to 69.48% in July-September 2014.

The Survey categorises the growth range in four broad categories, namely excellent (>20%), good (10-20%), low (0-10%), and negative (less than 0%).

The disaggregated analysis of the Survey reveals that most of the high and excellent growth has been registered by segments of white goods, synthetic fiber, consumer non-durables such as imported oils, groundnut oil, rape seeds, along with machine tools and rubber machinery, etc.

The Vehicle industry has witnessed a low to negative growth in most of the segments such as passenger cars, commercial vehicles, utility vehicle, tyres, etc. However, two wheelers and three wheelers have registered excellent growth.

Segments of White Goods industry such as refrigerators, air conditioners, small appliances have registered about 12%-15% high growth rate.  The LCD/LED segment has been witnessing a boost and growth has been exceptional pegging above 20% mark. The rural purchase trends and sales in tier 4 & 5 cities have contributed significantly to this growth.

The Basic goods sector, this time again, has registered low growth with major segments like steel, fertilizer, paints, pig iron, and cement registering growth between 0-6 percent on an average.

The intermediate goods sector after a prolonged period has shown positive growth trends. Segments such as power cables, circuit breakers, have grown between 10-20%. Other segments such as motors, ball and roller bearings, capacitors continue to record a low growth.

Later interacting with CII affiliated sector associations, Mr. Amitabh Kant, Secretary, Department of Industrial Policy and Promotion, Government of India stated that for economy to grow at 9-10%, manufacturing has to grow at 14-15% every year.   Countries such as Japan, Korea, China have emerged as leading global economies only by building a strong manufacturing base.  India, too has to create a strong manufacturing environment to come out of the present economic shackle.

On the issue of inverted duty structure raised by many industry associations, while assuring DIPP support,   he appealed industry associations to come out with a detailed analysis with strong facts and figures.

Earlier, Dr. Rajan Katoch, Secretary, Ministry of Heavy Industries, Government of India stated that the Department of Heavy Industries has formulated a scheme for enhancement of competitiveness of the capital goods sector.    Under the scheme an outlay of Rs. 930 crore has been sanctioned.  The scheme, on its implementation, would attempt to make the Indian capital goods sector globally competitive. The sub sectors of Capital Goods covered under the scheme are mainly for Machine Tools, Textile Machinery, Construction and Mining Machinery, and Process Plant Machinery. The proposed scheme addresses the issue of technological depth creation in the capital goods sector, besides creating common industrial facility centres.

During the interaction, the representatives of the sectoral associations shared their views on making their respective sectors globally competitive, attract investments, develop technological and R&D capabilities and exploit opportunity and image created by the the “Make in India Campaign”.  The associations also shared their concerns regarding the inverted duty structures, FTAs, highly graded tax structures, etc.

“There is an optimistic sentiment within the industry, with a strong confidence in new initiatives. The results of the ASCON Survey for this quarter are encouraging.   30.4% sectors have grown in the range of 10% and above mark.   Though the industry still feels that the complete rebound of manufacturing will take time, the government’s focus on Ease of Doing Business, Good Governance, Investments specifically inbound new investments will be the key areas eventually leading India towards becoming a strong manufacturing base.” said Mr Chandrajit Banerjee, Director General, CII.