Under the Indian regulatory framework, capital can be pooled under different fund structures like mutual funds, infrastructure debt funds (IDFs), real estate investment trusts (REITs), infrastructure investment trusts (InvITs) and alternative investment funds (AIFs). Though each structure is taxed differently, the previous three Union Budgets have introduced several changes that bring a certain degree of uniformity in their taxation. This development needs to be reinforced in future policy changes so that investors face broadly the same tax burden, irrespective of the fund structure.
This is important because lack of uniformity in taxation of different fund vehicles can lead to tax arbitrage, which increases the risk of tax uncertainty. The sudden change in the taxation of non-equity oriented mutual funds to bring them on par with other debt investments is a case in point. Lack of certainty in tax rules also creates fear among investors of retrospective taxation. Unwarranted differences in tax treatments also lead to tax efficiency assuming the most important role in the choice of investment vehicles, even though not all fund structures are suitable for investment in every asset class.
Over the previous three Budgets, significant progress has been made towards introducing a simplified and uniform fund taxation regime. In Budget 2014-15, partial tax pass-through status was provided to REITs and InvITs. However, the taxation framework introduced for these suffered from two problems. First, REITs and InvITs had to pay tax on income earned from directly holding assets (the other, indirect way to hold assets is to provide equity or debt to a special purpose vehicle, or SPV, which in turn holds the assets). Second, these funds suffered dividend distribution tax (DDT) when the asset holding SPV paid dividends to them.
Both these problems were addressed in the subsequent Budgets with the Union Budget 2015-16 providing tax pass-through to REITs and InvITs for income from directly held assets and the recently announced Budget proposing to exempt these funds from DDT. The previous Budget had gone further by also announcing tax pass through for certain categories of AIFs. IDFs structured as mutual funds already had a tax pass-through since their launch in 2011.
