Consider the following statements:
Statement-I: Interest income from the deposits in Infrastructure Investment Trusts (InviTs) distributed to their investors is exempted from tax, but the dividend is taxable.
Statement-II: InviTs are recognized as borrowers under the ‘Securitization and Reconstruction of Financial Assets and· Enforcement of Security Interest Act, 2002’.
Which one of the following is correct in respect of the above statements?
(a) Both Statement-I and Statement-II are correct and Statement- II is the correct explanation for Statement-I
(b) Both Statement-I and Statement-II are correct and Statement-II is not the correct explanation for Statement-I
(c) Statement I is correct but Statement II is incorrect
(d) Statement I is incorrect but Statement II is correct
Ans: d
Explanation:
What are InvITs?
InvITs are a type of investment vehicle that allows investors to invest in infrastructure projects. The main objective of InvITs is to provide retail investors with access to investment opportunities in infrastructure projects that were previously only available to large institutional investors.
InvITs offer investors the opportunity to invest in a diversified portfolio of infrastructure projects, which can provide stable income streams and potential capital appreciation over the long term. At the same time, it helps infrastructure projects tap into household savings
InvITs stand out as models of financial innovation aimed at sustainable development. Designed with a tiered structure where a sponsor sets up the InvIT, which then invests in various eligible projects directly or through special purpose vehicles (SPVs), these trusts offer a unique blend of stability and profitability.
Features and structure of InvITs
Where do they invest?
InvITs are similar to mutual funds or REITs, but they invest in infrastructure assets like toll roads, power transmission lines, and pipelines.
Structure
InvITs are created by sponsors, who are typically infrastructure companies or private equity firms. The sponsor sets up the InvIT and transfers ownership of the underlying infrastructure assets to the trust. The trust then issues units to investors, which represent an ownership stake in the trust and thus the underlying assets.
Investors in InvITs can earn returns in two ways: through regular distributions and potential capital appreciation. InvITs typically distribute most of their earnings to investors in the form of dividends, which can provide a regular income stream. In addition, if the underlying assets appreciate in value over time, investors can potentially sell their units for a profit.
Who can invest in an InvIT?
Publiclyplaced listed InvIT – Any person – resident/foreign
Privatelyplaced listed InvIT – Institutional investors and body corporates (Indian/foreign)
Tax implications on unit holders
Interest income from the SPV distributed by the InvIT
• Resident investor – at applicable rates (credit for taxes withheld at 10%)
• Non-resident investor (other than foreign portfolio investors (FPIs) – 5%12 (subject to the beneficial provision under the applicable tax treaty)
• FPIs – may be taxed at 20%12 (subject to the beneficial provision under the applicable tax treaty)
Dividend income (if SPV has opted for the concessional tax regime under Section 115BAA)
• Resident investor – at applicable rates (credit for taxes withheld at 10%) – benefit of Section 80M extended to domestic unitholder being a company, provided such dividend is distributed within the prescribed timeline
• Non-resident investor (including FPIs) – 20%12 (subject to the beneficial provision under the applicable tax treaty)
Dividend income (if SPV has opted for the old regime)
• Exempt for unitholders
Distribution of any proceeds other than interest and dividend; not taxable in the hands of InvIT
Distribution in excess of the issue price shall be taxable as income from other sources at applicable rates
• Resident investor – at applicable rate
s • Non-resident investor (other than FPIs) – taxable at applicable rates (subject to the beneficial provision under the applicable tax treaty, credit available for taxes withheld)
• FPIs – 20% (subject to the beneficial provision under the applicable tax treaty)
Sale of listed units (on stock exchanges)
• Long-term capital gains beyond INR 0.1 million taxable at 10%12
• Short-term capital gains taxable at a concessional rate of 15%12
• For non-residents, provisions and rates under applicable tax treaties to be considered
InvITs have been classified as ‘borrowers’ under Section 2(f) of the SARFAESI Act, pursuant to Section 2(da) of the Securities Contracts (Regulation) Act, 1956, which defines ‘pooled investment vehicles’ as inclusive of a ‘business trust’ as defined in Section 2(13A) of the Income-tax Act, 1961 and registered with SEBI, i.e., InvITs.
Hence, statement 1 is incorrect and 2 is correct.
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