The concept of business trusts was introduced by the Finance (No. 2) Act, 2014, to provide a structured and tax-efficient investment mechanism for infrastructure and real estate projects. Over time, the definition and taxation of business trusts have evolved significantly, making it crucial for investors and professionals to stay updated on the latest developments.
In this blog, we will explore:
- What is a business trust?
- Key legislative amendments
- Taxation of business trusts
- SEBI regulations
- Related provisions under the Income Tax Act
What is a Business Trust?
As defined under Section 2(13A) of the Income Tax Act, a “business trust” refers to a trust that meets specific criteria:
- It is registered as either an Infrastructure Investment Trust (InvIT) or a Real Estate Investment Trust (REIT) under the regulations made by the Securities and Exchange Board of India (SEBI).
- Until March 31, 2021, the units of such trusts were required to be listed on a recognized stock exchange.
Legislative Evolution of Business Trusts
1. Initial Definition (2014 – 2016)
Between October 1, 2014, and March 31, 2016, the definition of business trust applied to:
- Trusts registered as InvITs or REITs
- Trusts whose units were listed on recognized stock exchanges
2. Finance Act, 2015
Effective April 1, 2016, the definition was expanded to align with SEBI’s 2014 regulations. It retained the requirement for mandatory listing of trust units.
3. Finance Act, 2020
From April 1, 2021, the mandatory listing requirement was removed for InvITs. This change allowed private unlisted InvITs to enjoy the same tax benefits as their listed counterparts, aligning the Income Tax Act with the amended SEBI regulations.
Taxation of Business Trusts under Section 115UA
The taxation regime for business trusts under Section 115UA offers pass-through benefits, ensuring tax efficiency for investors. Key highlights include:
1. Tax at the Trust Level
- Income (excluding capital gains) is taxed at the maximum marginal rate.
2. Pass-Through Status
- Interest and Rental Income: These are exempt at the trust level when received from a Special Purpose Vehicle (SPV).
- No Withholding Tax: SPVs are not required to deduct tax on such income paid to the trust.
3. Income Tax Filing
- Business trusts must file a return of income under Section 139(4E).
SEBI Regulations and Business Trusts
The SEBI regulations governing business trusts provide the operational framework for their registration, structure, and compliance. Key regulations include:
- SEBI (Infrastructure Investment Trusts) Regulations, 2014
- SEBI (Real Estate Investment Trusts) Regulations, 2014
The 2019 amendments removed the mandatory listing requirement for InvITs, paving the way for private unlisted InvITs.
Related Provisions in the Income Tax Act
The definition and taxation of business trusts interact with various other provisions in the Income Tax Act. Some important sections are:
Exemptions and Deductions
- Section 10(23FC): Exempts interest or dividend income from SPVs.
- Section 10(23FCA): Exempts rental income from REITs.
Capital Gains Provisions
- Section 47(xvi): Transfer of SPV shares to a business trust in exchange for units is not treated as a “transfer.”
- Section 112A: Covers long-term capital gains taxation for units of a business trust.
TDS Obligations
- Section 194LBA: Governs tax deduction at source on distributions to unit holders.
Others
- Section 80M: Allows deduction for inter-corporate dividends received by the business trust.
- Section 115-O(7): Covers dividend distribution tax on dividends paid to business trusts.
Key Benefits of Investing in Business Trusts
- Tax Efficiency: The pass-through status ensures minimal tax burden for unit holders.
- Transparency: SEBI regulations provide a robust framework for operational and financial disclosures.
- Diversified Portfolios: Access to large-scale infrastructure and real estate assets.
- Ease of Transfer: Units of listed business trusts are tradable on recognized stock exchanges.
FAQs on Business Trusts
1. What is the main purpose of a business trust?
Business trusts are designed to facilitate investment in infrastructure and real estate projects through a structured mechanism that provides tax benefits and operational transparency.
2. Are private unlisted InvITs eligible for tax benefits?
Yes, following the amendments made by the Finance Act, 2020, private unlisted InvITs enjoy the same tax benefits as listed InvITs.
3. How are distributions from business trusts taxed?
Distributions such as dividends, interest, and rental income are generally passed through to unit holders without being taxed at the trust level, subject to specific conditions.
Conclusion
The introduction and subsequent amendments to the concept of business trusts reflect the government’s commitment to boosting infrastructure and real estate investment. With pass-through tax benefits and streamlined regulations under SEBI, business trusts offer a lucrative and tax-efficient investment option.
For more insights on business trusts and related provisions, visit our website at www.smarttaxsaver.com.
