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.

Rajasthan has stood the test of time and is poised to become a leading economy within India: Vasundhara Raje

We are committed to making Rajasthan a business-friendly State and have taken several steps in that direction, said Vasundhara Raje, Chief Minister of Rajasthan at a Special Plenary Session at The Partnership Summit in Jaipur on January 16, 2015. The Partnership Summit is jointly organized by the Confederation of Indian Industry (CII), the Department of Industrial Policy and Promotion, Government of India, and the Government of Rajasthan.

Partnership Summit 2015
Ms Vasundhara Raje, Chief Minister, Government of Rajasthan addressing at the inaugural session of the Partnership Summit 2015 on 15 January, 2015 at Jaipur.

With a view to encouraging investments into the State, the Chief Minister spoke of a slew of measures undertaken in areas such as policy, infrastructure, labour among others. She said the State Government is committed to simplifying and rationalizing regulations and laws, and especially mentioned the Rajasthan Investment Promotion Scheme launched in 2014, and the reforms in the Labour Laws, as measures that would boost investments. In fact Rajasthan’s reforming Labour Laws is seen as  a step worth emulating by other States also. As testimony to the State’s attractiveness as an investment destination, the Chief Minister spoke of JCB, Saint Gobain and Honda as three multinationals which have huge investments in the State. Moreover, the Koreans have also expressed interest in investing in the State, and Rajasthan will soon engage with the Bombay Stock Exchange to set up a Centre to impart training in financial skills. The Minister emphasized that partnership between the Central Government, the State Governments and industry will be critically important to accelerate India’s growth and development.

Earlier, Minister for Industries, Government of Rajasthan, Gajendra Singh Khimsar spoke of the locational and other advantages that the State offers such as abundant land; proximity to India’s capital; the Delhi-Mumbai Industrial Corridor passing through the State; abundant labour; ample power; diversity of products – textiles, cement, glass, agro-based products, leather goods and geographical and cultural richness which offers huge tourism potential. He mentioned that the State has already initiated several reforms in laws and regulations and is working on a new industrial policy to further facilitate investments. He said that with the CM emphasizing skill development, Rajasthan will be one of the few states to offer abundant skilled labour, good infrastructure and regulations and laws that promote Ease of Doing Business. He mentioned the Rajasthan Solar Policy and the announcement of building 20,000 kms of mega highways that will be like a shot in the arm to boost industry.

(L-R) Shri C S Rajan, Chief Secretary, Govt. of Rajasthan; Shri Gajendra Singh Khimsar, Minister for Industries, Government of Rajasthan; Mr Chandrajit Banerjee, Director General, CII; Mr Sumit Mazumder, President Designate, CII and Chairman and Managing Director, TIL Limited; Ms Vasundhara Raje, Chief Minister, Government of Rajasthan; Shri Suresh Prabhu, Minister for Railways and India’s G20 Sherpa, Government of India; Ms Nirmala Sitharaman, Minister of State (Independent Charge) for Commerce and Industry, Government of India; Mr Nikola Gruevski, Prime Minister of Macedonia; Shri Amitabh Kant, Secretary, Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce and Industry, Government of India and Mr Ajay S Shriram, President,CII and Chairman & Senior Managing Director, DCM Shriram Ltd at the inaugural session of the Partnership Summit 2015 on 15 January, 2015 at Jaipur.

Elaborating on investment opportunities in Rajasthan, Veenu Gupta, Prinicpal Secretary – Industries, Government of Rajasthan said Rajasthan offers the basics required for industrial development – infrastructure, labour, land, educational institutions which produce quality manpower. She mentioned how RIICO encourages investments and provides industrial infrastructure, especially for sector-specific industrial areas such as IT Parks. Rajasthan, she said, is the first state to have a country-specific zone (Japan) with more countries evincing interest in this. Among sectors with good investment potential, she mentioned automotive; ceramic and glass; IT; ESDM; Solar; Defence; Urban Centres and Tourism. She mentioned that the State Government is looking at PPP as an excellent model to realize the potential that Rajasthan offers.

Mr Amitabh Kant, Secretary, DIPP, Ministry of Commerce and Industry, Government of India, said that the key challenge for India today is to find ways to accelerate India’s growth rate to 9/10 per cent over an extended period of time, which can be achieved with the active participation of States. He praised Rajasthan saying it is a State focused on reforms and enhancing ease of doing business and said that amongst Indian States, Rajasthan has taken the lead in terms of reforms and delivering on its commitments. He said that Rajasthan offers tremendous potential, and will be the solar capital of India, urging investors to focus on Rajasthan if they wanted to create wealth.

Sharing their experiences as investors in the State were Vipin Sondhi, Chairman, CII National Committee on National Goods and Engineering and MD and CEO, JCB India Ltd and B. Santhanam, Chairman, CII Task Force on GTC 100, President- Flat Glass, South Asia, Malaysia, Egypt and MD, Saint Gobain Glass India Ltd who vouched for the efficient and transparent systems and the industry-friendly policies that the State offers to investors.

Earlier in his welcome address, Mr. Sumit Mazumder, President – Designate, CII stated that the state of Rajasthan had immense potential for investors. Rajasthan accounts for 10.4% of the country’s geographical area, but only 5.7% of the population. It is the eighth largest state economy in the country, and accounts for around 4.4% of the country’s GDP in 2012-13.

India needs USD 4.7 trillion investment over next 5 years for 7% growth – CII study

In a projection of investment requirement in the Indian economy over the next five years (2014/15 to 2018/19) for achieving an average growth of 7 per cent per annum, the Confederation of Indian Industry (CII) has estimated the figure at Rs. 280 lakh crore (USD 4.7 trillion), which is nearly double the value of Rs. 139 lakh crore (USD 2.9 trillion) that was invested in the last 5 years. 

CII study titled ‘Investment Requirements in India: 2014/15 to 2018/19’, has also estimated sectoral investment targets. Monetary, fiscal, trade and other relevant policies could be realigned to help the economy mobilize the required investment, according to the study. 

Mr. Chandrajit Banerjee, Director General, CII said “the study aims at estimating the future investment requirements of the economy, charting out a roadmap for investment across sectors and identifying the possible sources of funding so as to help  in aligning our policies to meet the target in a time-bound manner.” 

CII projects an average growth of 6.3 per cent for the industrial sector over the next 5 years, up from 5.2 per cent in previous corresponding period, for which a cumulative investment of Rs 146 lakh crore is required. Of this, Rs 98 lakh crore is to be invested in manufacturing alone, which is understandable from the fact that the sector needs to accelerate its growth and create mass employment to absorb the rapidly growing population of job seekers, either displaced from agriculture or the result of growing population. 

High growth of manufacturing is also critical for sustaining elevated growth of services sector as witnessed in the last several years. Services sector in the study is projected to grow at an average of nearly 8 per cent per annum, roughly the same as in the previous 5 years period and it requires an investment of Rs. 98 lakh crore. “If manufacturing sector is able to meet the desired investment target, it should automatically lead to greater attractiveness of services sector. Having said that, there is also a vast unexploited potential in areas such as health, education, trade, financial services and tourism, where appropriate policy interventions can make a big difference”, stated Mr. Banerjee. 

Agriculture sector, which continues to be heavily dependent on rain for irrigation and has recorded abysmally low productivity when benchmarked against international standards, is desired to expand by an average growth of 4 per cent per annum over the next 5 years, requiring a total investment of Rs. 36 lakh crore. 

“Meeting the target of agriculture sector is perhaps the most critical from the perspective of maintaining macro balance of the economy. In recent years, we have seen how food inflation has not only affected the vulnerable sections of population in the country but has also resulted in a tighter monetary policy, thus lowering the overall economic growth. In order to usher in modernization in agriculture sector and accelerate its productivity growth, it is critical that policies are geared up to make the sector much more attractive for private sector investment”, stated Mr. Banerjee. 

CII expects infrastructure investment to go up from around Rs 24 lakh crore (USD 500 billion) in XI plan period to Rs. 64.3 lakh crore (USD 1071 billion) during 2014/15- 2018/19 period. The figure is comparable to the Planning Commission’s estimate of around USD 1.0 trillion during the 12^th plan period. Investment in infrastructure is estimated to average 7.7 per cent of GDP over the next five years, up from 7.2 per cent recorded during the XI plan period.

The CII study suggests that around 40 per cent of the total investment in infrastructure should come from private sector, which is lower than 48 per cent prescribed by the Planning Commission for the 12^th plan period. Commenting on the need for greater investment from public sector, Mr. Banerjee said that “the private sector continues to face multifarious challenges in infrastructure and even PPP has failed to produce desired results, making the task of raising nearly half of investment from private sector, as envisaged in the 12^th plan document, quite difficult in the present milieu.” 

He added that among the various possible sources of public sector funding, it may be worthwhile to look at options like disinvestments, utilising the reserves & surplus of Central PSUs, disposing off the assets of sick PSUs among others. 

CII welcomes focus on speedy project implementation and modernisation in Railways

 

Confederation of Indian Industry (CII) has called for revamping and restructuring of the Indian Railways by developing a sustainable financial model to ensure feasibility of projects. Revamping of the Railway tariff, allowing FDI in railways and encouraging Joint Ventures and PPPs must be explored to access funds. 

CII also welcomes the Government’s emphasis on bringing investment into the Indian Railways through FDI and PPP projects.

CII has been calling for higher investments in rail infrastructure which may be achieved by faster implementation of key railway projects, such as the Dedicated Freight Corridor, high-speed rail corridors, procurement of rolling stock and other capacity enhancement works. Also there is a need to establish clearly defined policies and developing model documents for PPP development, ensuring transparency about the methodology and thought process behind various policy and operational issues that impact private investments. Streamlined and time-bound approvals for all projects by setting up a dedicated cell with a single window policy will help in expediting the implementation of projects. 

CII calls for the creation of a formal consultative mechanism between industry and Indian Railways for regular interaction to take up matters related to policy and strategy.

‘The honorable minister’s statement, in the interim budget, to focus on continuing investment in important projects is a very encouraging move’, said Mr Tilakraj Seth, Executive Vice President (Infrastructure and cities, sector cluster lead, South Asia), Siemens Ltd. and Vice Chairman, CII Rail Transportation and Equipment Division. ‘While this is an interim budget (vote on account) Ministry of Railways should focus on speedy project implementation and address structured measures in the next regular budget. The message in the interim budget on enhancing Rail network to include unconnected regions is welcome as it will enhance Rail revenue share’, he further added. 

Commenting on interim Rail Budget 2014-15, Mr Ramesh Maheshwari, Executive Vice Chairman, Texmaco Rail & Engineering Ltd. and Past President, CII said that ‘it bears special mention that despite the budgetary approval of the Parliament in place, no orders for wagons have been placed on the Industry for 2 successive years – 2012-13 and 2013-14. As a result, the Industry is starved of workload and struggling for survival’.

According to Mr Umesh Chowdhary, Vice Chairman & Managing Director, Titagarh Wagons Limited and member, CII Rail Transportation and Equipment Division, ‘the Budget was more like a recap of the Railways’ performance over the current plan period. However a few positives from the Hon’ble Minister’s speech were that he emphasized the importance of the Railways as the essential feature for national development and a sector which needs substantial attention and investments. The Minister has also emphasized upon moving forward with certain critical policies and projects such as FDI in Railways, completion of the DFC to free up existing track capacity, introduction of a freight regulator etc. All of these are extremely positive and essential for the future of the Railways’, said Mr Chowdhary.

‘Over all, I would feel that the budget has been pretty much on expected lines and all expectation and eyes would be towards the maiden Railway Budget of the next Railway Minister in a few months’, said Mr Chowdhary.

CII also welcomes the move to engage with all the stakeholders for fixing of fares and freight by the Independent Rail Tariff Authority.