Infrastructure Investment Trusts (InvITs): Types,taxation, and structure

InvITs stands acronym for Infrastructure Investment Trusts. They are similar to REITs but invest in infrastructure projects like roadways, power plants, transmission lines, and other infrastructure.

As per current SEBI Regulations InvITs can be divided into 5 key types depending on the types of infrastructure they own or operate:

• Energy such as power generation and distribution
• Transport & Logistics e.g. operating highways and other toll roads
• Communications e.g. optical fibre networks and telecom towers
• Social and Commercial Infrastructure and
•  Irrigation networks

The business model of Infrastructure Investment Trusts is also like mutual funds that pool money from investors that own and operate operational infrastructure assets like highways, roads, pipelines, warehouses, power plants, etc. They offer regular income (via dividends) and long-term capital appreciation.

An InvIT must invest at least 80% of its total assets in completed infrastructure projects capable of generating income. The remainder of assets up to a limit of 20% held by the InvIT can be invested in under-construction infrastructure projects and various SEBI-approved Equity, Debt, and Money Market instruments.

InvITs must distribute at least 90% of their income to their unit holders as dividends on a bi-annual basis. These are distributed on a quarterly or biannual basis. The dividend is paid on a per-unit basis to the unit holder of the InvIT.

Taxation:

Dividend income is exempt in the hands of unit holders, in most cases. However, if the SPV opted for a lower tax regime, dividends along with interest/rental income are taxed at the slab rates applicable to an investor.

 In the budget 2023-24 it was proposed loan repayment’ component of the distributed income from trusts has to be taxed as part of ‘the income from other sources’ of unit holders that attracts tax at slab rates of an individual. However, the government paid heed to the industry’s plea as it modified the Budget proposal. The amended tax rules indicate that the amount received as ‘loan repayment’ must be reduced from the cost of acquisition at the time of sale of the unit by the investor. This amendment brought relief to investors as well as industry players as capital gains attract just 10% tax if held for the long term (36 months). This is against the tax on ‘other income’ that is at individual’s slab rates, which can go to as high as 42% (including surcharge and cess) for those in the higher tax bracket. The amended stance substantially reduces the tax incidence, as a capital gains tax at the point of sale rather than a marginal tax rate on receipt of payment. This new amendment increases the relative attractiveness of REITs / InvITs as the major taxation overhang is removed. However, the proceeds will be taxed at slab rates and not as capital gains (10% on long-term gains and 15% on short-term gains).

Structure of InvIT:

The InvIT is designed as a tiered structure with the Sponsor setting up the InvIT which in turn invests into the eligible infrastructure projects either directly or via special purpose vehicles (SPVs).

InvIT has a sponsor, investment manager, and trustee as separate entities regulated under SEBI (Infrastructure Investment Trusts) Regulations, 2014.  

The sponsor of InvIT must have a net worth of not less than Rs. 100 crore and if it is a body corporate or a company; or LLP net tangible assets of value shall not less than Rs 100 crore. The sponsor or its associates must have a sound track record in the development of infrastructure or fund management in the infrastructure sector, have a minimum 5 years of experience as a developer, and completed a minimum of two projects. The sponsor on behalf of the trust drafts InvIT instrument of trust in the form of a deed and registers the same under the provisions of the Registration Act, of 1908.

Investment Manager: The investment manager has a net worth of not less than Rs 10 crores and if it is a body corporate or a company or LLP the net assets of value not less than 10 Crores. They must have not less than 5 years of experience in funds management or advisory services or development in the infrastructure sector. They must have an office in India where the operations of the InvIT are proposed to be conducted. They must have not less than one employee who has at least five years’ experience in the relevant sub-sector(s) in which the InvIT has invested or proposes to invest. Half of the directors or members of the governing board, or in case of an LLP as independent shall not be directors or members of the governing board of another InvIT.

Trustees: Trustees shall register with SEBI and he is not associated either with Sponsor or Manager the trustee has such wherewithal concerning infrastructure, personnel, etc. to the satisfaction of the SEBI and by circulars or guidelines specified by it.

Unitholders:

No unit holders have superior voting or any other rights over another unit holder. Further, there shall not be multiple classes of units of InvITs. Notwithstanding the above, subordinate units may be issued only to the sponsors and their associates, where such subordinate units shall carry only inferior voting or any other rights compared to other units.

Listing: After the appointment of the managers, the InvIT can be registered. After registration, the InvIT can choose to get listed on stock exchanges and raise money by selling its units to the general public. Alternatively, the InvIT may choose not to get listed on the stock exchange and raise money by selling units to a small number of investors.