Stamp Duty for property transfer

Following representations received by the prime minister’s office (PMO) from both domestic and foreign private equity players in the past two months, Finance Minister Arun Jaitley is expected to consider the issues of scrapping stamp duty on transfer of properties by private individuals and firms to real estate investment trusts (Reits) and making dividend distribution tax (DDT) ‘pass through’ for Reits and investors in the trusts. Tax levies, including DDT and stamp duty issues, were flagged by top investment bankers and chief executives of companies like JP Morgan & Blackstone.

The real estate industry, equity investors and international trusts have represented to the government for granting “pass through status” for dividend payments by Reits. In effect, rental income from assets with the trusts would not be liable for tax as and when these assets or units are returned to the investors.

The demand for exemption from payment stamp duty and DDT was put forward after the government recently scrapped long-term capital gains tax on transfer of Reits units by their sponsors or investors. An exemption on payment of minimum alternate tax (MAT) when investors transfer shares to the Reit or on sale of Reits units was also granted by the Government recently.

Pending tax issues have been dissuading equity investors and real estate companies from making it big in real estate investment trusts (Reits) and infrastructure investment trusts (InvITs), rating agency CARE said in a note. In his last budget, finance minister Jaitley had given hope to real estate companies looking to list their rent-yielding real estate assets through Reits. Reports from various analysts suggest that the potential for Reits listing in India was about $ 20 billion since in May, the Union cabinet allowed foreign investors to take exposure in Reits to bring in capital and reduce the debt liability of domestic real estate companies.

As per estimates made by real estate firm Raheja Group, the top seven cities of India have more than 400 million square feet of operational office space; of which, over 150 million sq feet would be ready for Reits listing by April.

The largest realty developer, DLF has announced plans to start two Reits, with one exclusively for commercial office space. The company plans to monetize about 30 million sq feet office and retail space by the end of this financial year.

“The government may not wait till presentation of Budget in February next year, instead, it may shortly notify the exemption on payment of stamp duty on transfer of properties to Reits,” confirmed a PMO official. “Exempting Reits completely from payment of DDT might need further discussion,” he added.

In a major development, the finance ministry has allowed the public sector banks to use their real estate to raise money from the market through Special Vehicle Purpose (SPV). Most of the properties which would give handsome gains to banks are situated in metropolitan areas such as Mumbai, Chennai and Delhi.

G S Sandhu, the Union government’s financial services secretary said that besides hiving-off non-core assets at good valuations, public sector banks can use their real estate to raise money from the market through an SPV.

Finance Minister Arun Jaitley while presenting the Union Budget for 2014-15 had said PSBs will need equity capital infusion of Rs 240,000 crore by March 2018 to be in line with Basel-III norms. With its huge fiscal deficit, the government is battling to rein in expenditure. It has limited resources to infuse capital in PSBs and has asked the latter to explore options such as offloading non-core investments and exploiting real estate assets.

As per expert opinions, government-owned Bank of India (BOI) could generate about Rs 2,500 crore by monetizing its real estate assets, especially properties in metropolitan cities, for equity capital.

Exemplifying the arrangement for such a transaction, a senior BOI executive said the Mumbai-headquartered bank could float a wholly-owned subsidiary for the deal. The selected real estate assets that include buildings, head office premises and residences would be formally transferred to this subsidiary, a Special Purpose Vehicle (SPV), at value. He said the bank had been working for about six months on a proposal involving valuation and the estimate of benefit and tax burden. The market value of real estate assets is pegged around Rs 6,000 crore. The book value could be Rs 2,800-3,000 crore. The bill for tax, stamp duty and fees could be about Rs 500 crore. After deducting expenses, the gains estimated at Rs 2,500 crore would straightaway add to the bottom-line and bolster the capital adequacy ratio. The BOI’s capital adequacy was 9.97 per cent by Basel-III norms at the end of March this year. BOI would pay rentals to the subsidiary for using space. This subsidiary will need capital infusion from the parent bank. It will raise debt for buying out real estate assets of the bank.

Prior to such an arrangement taking place, BOI will have to get past two challenges like securing approval from the Reserve Bank of India (RBI). Secondly, clarity on paying taxes ie exemption from capital gains and stamp duty. On the regulatory nod, a BOI executive said the bank had already sounded out RBI.