The Finance Minister introduced the Finance Bill, 2021 (Bill) on 1 February 2021 with a slew of measures to boost the Indian infrastructure sector. The Bill proposes some key amendments that impact infrastructure investment trusts (InvITs) and real estate investment trusts (REITs). Some of these amendments include changes in the definition of securities, enabling a secured creditor to initiate actions against a ‘pooled investment vehicle’ that defaults in the repayment of principal or interest to its lenders, reducing the compliance burden of withholding tax and widening the base for eligible sovereign wealth funds (SWFs) and Pension Funds (PFs) by doing away with some of the conditions which were difficult to comply with.
Amendments to the Securities Contracts (Regulation) Act, 1956
The Bill proposes certain amendments to the Securities Contracts (Regulation) Act, 1956 (SCRA), effective from 1 April 2021. One such amendment is the introduction of the concept of ‘pooled investment vehicle’. The proposed term defines pooled investment vehicle to mean a fund established in India, in the form of a trust or otherwise, which would include mutual funds, alternative investment funds (AIFs), collective investment schemes or business trusts (as defined in the Income-Tax Act, 1961 (IT Act) and registered with the Securities and Exchange Board of India (SEBI)), or such other funds, which raise or collect money from investors and invest such funds in accordance with SEBI regulations. It is pertinent to note that the IT Act defines business trusts as trusts registered with SEBI as an InvIT or a REIT.
Additionally, the Bill proposes that units or any other instruments issued by ‘pooled investment vehicles’ will be recognised as ‘securities’ under the SCRA.
Further, a new provision under the SCRA allowing pooled investment vehicles to (i) borrow and issue debt securities in accordance with regulations framed by SEBI; and (ii) provide security interest to lenders in terms of the facility documents entered into by such pooled investment vehicles, is proposed to be inserted.
The amendments proposed to SCRA may have different tax consequences for different investors. Earlier there was little clarity on the availability of concessional long-term capital gains tax rate for non – residents on the transfer of unlisted units of InvITs and REITs. Through this amendment, the Government has offered certainty on the availability of such concessional tax rate. However, as a consequence of the amendment, since these units are now within the ambit of ‘securities’, grant of these units would be subject to deemed gift tax provisions under the IT Act. This may have an adverse consequence on new investors / limited partners (LPs) investing into an AIF after the first close of the AIF and buying units of the AIF at the same price as the previous LPs. To elaborate, since the AIF would have made investments after the first close, there may have been an appreciation in the net asset value (NAV) of such AIF. However, given than the new LPs would be buying the units at the same price as the previous LPs, there may be a risk that this difference in price between the issue price of AIF units and the NAV can incur a tax liability for the incoming LPs under the deemed gift tax provision going forward. Thus, consequence of deemed gift tax provisions on compensating contribution would merit consideration on a case by case basis.
Borrowings by InvITs and REITs liberalised
The Finance Minister mentioned in her speech that to enable debt financing to InvITs and REITs by foreign institutional investors (FIIs) amendments are being proposed to relevant legislations. This may potentially open up a large source of fresh funding for these entities.FIIs are already provided a beneficial tax treatment on short term capital gains and it is felt that further enabling debt financing may increase the flow of foreign investments in infrastructure projects in India, not only from private players but also from Sovereign Wealth Funds (SWFs).
Further, to incentivise SWFs to invest in Indian infrastructure, the Bill proposes to relax some of the conditions for availing 100% tax exemption, as discussed below.
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