Investors, banks will soon opt for Reits
Q: I am bullish on the real estate sector in India but unfortunately real estate investment trusts have not picked up so far. Is there a possibility that such investment opportunities will be available?
- M.R. Patel, Dubai
A: Real estate investment trusts (Reits) and infrastructure investment trusts (InvITs) will see the light of day sooner than later. The reason is that the Reserve Bank of India has now taken a policy decision to permit banks to invest in these trusts. Currently, banks are permitted to invest in mutual fund schemes, venture capital funds and equity share capital to the extent of 20 per cent of their net owned funds.
Investments in Reits and InvITs can be made by banks within the 20 per cent limit of net owned funds. It is, therefore, expected that these trusts will now offer their products to both domestic and international investors. These trusts are like mutual funds which can be listed on the stock exchange. In the case of Reits, the security is the revenue-yielding property; for InvITs, the security is the infrastructure project. In the Union Budget of 2017, the government has provided exemption from withholding tax in the case of these trusts. This will make the trusts attractive for retail investors.
Q: An American company for which I am working has set up a liaison office in India by taking premises on rent. Would the company be liable to pay tax in India? I have been told that a liaison office does not create a permanent establishment (PE) in India for the foreign company and, therefore, it is not liable to pay tax.
- T.R. Mitra, Manama
A: The facts of this case will have to be ascertained to determine whether the American company has a permanent establishment in India or not. A PE arises when there is a fixed place of business in India from where a business is carried on. If the liaison office carries on activities in India which are preparatory or auxiliary in nature, there would be no PE in India.
However, if the place of business in India carries on core activities such as marketing, sales promotion, negotiation of prices or entering into contracts with customers, a PE will be deemed to be established and profits earned which are attributable to such PE will be taxable in India. For determining the taxable profits, the normal method of computing profits under the Indian tax law will be applicable.
Q: Exports from India have been stagnating during the past couple of years. As the rupee has started rising, it may further impact export earnings in India. Is there any hope of a turnaround?
- D. Natarajan, Doha
A: Contrary to expectations, the growth in export of goods from India reached its peak in March 2017 with a 27.6 per cent increase year on year. The figure for March 2017 is $29.23 billion. During the full financial year April 2016 to March 2017, exports have touched $274.64 billion. There was a sharp rise in global orders for engineering goods, readymade garments and petroleum products.
This growth in exports is to be seen in the context of a rise in rupee value of about six per cent during the last three months. Fortunately, India is not dependent on exports for its gross domestic product growth (GDP) unlike countries like China and Japan. As far as the outlook for 2017-18 is concerned, the World Trade Organisation has predicted a declining trend for global trade. This may affect the GDP growth rate for countries which are dependent on exports.
The writer is a practising lawyer specialising in tax and exchange management laws of India. Views expressed are his own and do not reflect the newspaper's policy.
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