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REIT and InvIT

Topics Covered: Infrastructure.

REIT and InvIT

What to study?

For Prelims: Features of InvIT and REIT.

For Mains: Need for and significance of InvIT and REIT.

Context: The proposal in the Union Budget to tax dividend in the hands of unit holders/ investors would hurt future InvITs and REITs, say real estate and infrastructure industry officials and analysts.

Why and how?

  • Such a decision is contrary to the government’s move to encourage InvITs and REITs to provide tax stability to long-term infrastructure investors.
  • Uncertainty in the tax regime would hurt the sentiment of foreign investors who are already wary of the stability of tax regime in India, they added.
  • The resultant tax burden on the part of investors will put at risk plans for raising about $100 billion with regard to INVITs and REITs.

What are Infrastructure Investment Trusts (InvIT)?

It is like a mutual fund, which enables direct investment of small amounts of money from possible individual/institutional investors in infrastructure to earn a small portion of the income as return.

  1. InvITs can be treated as the modified version of REITs designed to suit the specific circumstances of the infrastructure sector.
  2. They are similar to REIT but invest in infrastructure projects such as roads or highways which take some time to generate steady cash flows.

What are Real Estate Investment Trusts (REIT)?

A REIT is roughly like a mutual fund that invests in real estate although the similarity doesn’t go much further.

  1. The basic deal on REITs is that you own a share of property, and so an appropriate share of the income from it will come to you, after deducting an appropriate share of expenses.
  2. Essentially, it’s like a group of people pooling their money together and buying real estate except that it’s on a large scale and is regulated.

Why need InvITs and REITs?

  1. Infrastructure and real estate are the two most critical sectors in any developing economy.
  2. A well-developed infrastructural set-up propels the overall development of a country.
  3. It also facilitates a steady inflow of private and foreign investments, and thereby augments the capital base available for the growth of key sectors in an economy, as well as its own growth, in a sustained manner.
  4. Given the importance of these two sectors in the country, and the paucity of public funds available to stimulate their growth, it is imperative that additional channels of financing are put in place.

Sources: the Hindu.