Capital Gains and InVITs

- Samir Kanabar
Capital Gains

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Charging section

Section 45 – Any profits and gains arising from the transfer of capital asset effected in the previous
year, shall be chargeable to income-tax under the head ‘Capital Gains’ and shall be deemed to be
income of the previous year in which the transfer took place unless such capital gain is exempt under
section 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H.

Breaking up the above provisions gives the following essential conditions for taxing capital gains:

1 2
There must be a capital The capital asset must
asset be transferred

Such capital gain should

3 4
There must be profits or
gains on such transfer not be exempt under
i.e. capital gain section 54, 54B, 54D,
54E, 54EA, 54EB, 54F,
54G and 54H

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Year of chargeability

Section 45 (1): Capital Gains is chargeable in the previous year in which transfer of capital asset takes
place.

Exceptional situations Year of charge of capital gains

Section 45(1A) - Receipt of insurance proceeds Taxable in the year of receipt of insurance
in case of damage/ destruction of capital assets proceeds

Section 45(2) - Conversion of capital asset into
stock in trade
Section 45(5) - Transfer by way of compulsory
acquisition under law
Section 45(5A) – Joint development agreements
for real estate projects
Taxable in the year of transfer of stock in trade
Taxable in the year of receipt of the compensation
Taxable in the year in which certificate of
completion is received from authorities

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Definition of transfer

Section 2(47) - transfer includes:

► Sale, exchange or relinquishment of the asset
Section 2(47)

► Extinguishment of any rights in the asset

Transfer

► Compulsory acquisition of asset under any law

► Conversion of the asset into stock-in-trade
► Maturity or redemption of a zero-coupon bond
► Any transaction involving the allowing of the possession of any immovable property
to be taken or retained in part performance of a contract
► Any transaction which has the effect of transferring or
enabling the enjoyment of any immovable property

Additionally transfer has been defined to include

► Disposing of or parting with a capital asset or interest therein.
► Creating any interest in any capital asset
► Whether directly or indirectly
► Whether absolutely or conditionally
► Whether voluntarily or involuntarily
► Whether by agreement or otherwise
This is notwithstanding that transfer of capital asset is characterized as effected or dependent upon or flowing
from transfer of a share/shares of a foreign company.

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Exceptions to definition of transfer

Exceptions to definition of transfer ► Distribution of capital assets on the total / partial partition of an HUF

► Transfer of a capital asset under a gift, will or an irrevocable trust

► Transfer of a capital asset by holding company to subsidiary and vice versa

(where subsidiary is entirely held by holding company and subsidiary / holding
company is an Indian company)

► Transfer under a scheme of amalgamation provided the prescribed conditions

are satisfied
Section 47

► Transfer on account of amalgamation of a foreign company (deriving

substantial value from shares of an Indian company) to another foreign
company provided prescribed conditions are satisfied

► Transfer under a scheme of demerger / business reorganisation provided the

prescribed conditions are satisfied

► Transfer under a scheme of demerger of a foreign company (deriving

substantial value from shares of an Indian company) to resulting foreign
company provided prescribed conditions are satisfied

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Exceptions to definition of transfer

▪ Transfer of bonds / GDRs / Rupee denominated bond/ Derivative by NRs outside India
Exceptions to definition of transfer
▪ Conversion of bonds/ debentures, etc into shares/ debentures
▪ Transfer of capital asset / intangible asset by firm to company on succession of the firm

▪ Transfer of capital asset / intangible asset by a private company / unlisted company

to an LLP or transfer of shares held by the shareholder on conversion of the said

Section 47

company to an LLP

▪ Transfer of capital/ intangible asset on succession of sole proprietary concern to company

▪ Transfer of capital assets in a transaction of reverse mortgage under a scheme

made and notified by the Central Government

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Definition of capital asset

Inclusions:
► Property of any kind held by an assesse (whether or not in connection with his
business or profession)
► Any securities held by Foreign Institutional Investors (FIIs) which has invested
Capital Asset
Section 2(14)

in such securities in accordance with the regulations

Exclusions :
► Stock in trade (other than securities referred to above), consumable stores or
raw materials held for the purpose of business or profession
► Personal effects excluding jewellery, archaeological collections, drawings,
paintings, sculptures, any work of art
► Agricultural land (subject to exceptions)
► Gold bonds
► Special bearer bonds
► Gold deposit bonds

“property” includes and shall be deemed to have always included any rights in or in relation to an
Indian company, including rights of management or control or any other rights whatsoever

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Whether a capital asset?

Right to obtain conveyance CIT v Tata Teleservices

of an immovable property Yes [1980] 122 ITR 594 (Bom)

Right to sue for damages for CIT v Abbasbhoy A Dehgamwalla

breach of contract No [1992] 195 ITR 28 (Bom)

Travancore Tea Estate Co. Ltd v CIT

Trees standing on agricultural land Yes [1974] 93 ITR 314 (Ker)

Gold, silver coins and bars used Maharaja Rana Hemant Singhiji v CIT
for puja Yes [1976]103 ITR 61 (SC)

CIT v Sitadevi N.Poddar

Silver utensils used in the kitchen No [1984]148 ITR 506 (Bom)

Kirloskar Asea Limited v CIT

Foreign currency in a foreign bank Yes [1979] 117 ITR 82 (Kar)

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Long-term/ Short-term capital asset

► ‘Short-term capital’ asset means a capital asset which is held for not more than 36 Months
preceding the date of its transfer

Exceptional situations Short-term if the asset is held less than

Shares of a company or any other security listed in a 12 Months
recognized stock exchange in India

Units of Unit Trust of India 12 Months

Units of an equity oriented fund 12 Months
Zero coupon bond 12 Months
Unlisted shares of a company 24 Months

Immovable property, being land or building or both 24 Months

► Short-term capital gain: Gain on transfer of short-term capital asset

► Long-term capital asset: Any asset, which is not a short-term capital asset
► Long-term capital gain: Gain on transfer of long-term capital asset

Land is held for more than 24 months but the building constructed thereon is less than 24 months
old as on the date of transfer. Type of asset – Short-term or Long-term?

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Mode of computation

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Mode of computation – Section 48

Step 1 Step 2 Step 3

Determine full value From step 1, deduct the following: From step 2, deduct

of consideration ▪ Expenditure incurred wholly and exemptions, if any

exclusively in connection with the

transfer

▪ Cost/Indexed* cost of acquisition

▪ Cost/Indexed* cost of improvement

Resultant amount would be long/ short-term capital gain/ loss

* Indexation adjusts the cost of acquisition / improvement for changes in the cost of inflation index

1) Full value of consideration? 3) Cost of improvement?

2) Cost of acquisition? 4) Expenditure incurred in

connection with transfer?

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Concept of indexation – second proviso to
section 48
► Indexation is a technique to adjust income payments by means
Why this proviso of a price index, in order to maintain the purchasing power of the
public after inflation

► Resident and non-residents (in specified cases only)

Applicability ► LTCG arising from the transfer of a LTCA
► Specifically excludes - Shares or debentures of an Indian
Company transferred by a non-resident

If the capital asset is acquired up If the capital asset is acquired on or

to 31 March 2001 after 1 April 2001

CII for year of transfer

Computation CII for year of COA x
COA x transfer
* CII for the first year in
100 which the asset was
held

*COA shall be original cost of acquisition or fair market value of the asset on 1 April 2001, at the option of the assessee

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Rates of tax

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Rates of tax on Long-term/ Short-term capital
gain
Condition Tax rate applicable (plus
surcharge and cess)
On transfer of equity shares or units of 15% (u/s 111A)
Short Term Capital equity oriented fund or units of business
Gain (STCG) trust which is chargeable to securities
transaction tax (STT)
On transfer of short term capital asset STCG is included in the
other than those mentioned above gross total income of the
taxpayer

Condition Tax rate applicable (plus

surcharge and cess)
On transfer equity shares or unit of equity 10% on LTCG over and
oriented fund or unit of business trust which above Rs 1 lakh
Long Term Capital is chargeable to STT
Gain (STCG) On transfer of listed shares or units [ other 20% (with indexation
than those mentioned above] or zero benefit)
coupon bonds 10% (without indexation
benefit)
On transfer of long term capital asset other 20%
than those mentioned above

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Infrastructure Investment Trust (InVITs)

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 Infrastructure Investment Trusts (‘InvIT’)
Benefits and Features
Long term Features of InvIT
yielding cash
flows for • InvIT to invest in projects as under:
infrasture • either directly or
sectors with • through SPVs (at least 51% holding at SPV
Provides more stable and fixed level); or
stable equity revenues* Mandatory
financing as distribution of • Two level entity (Hold Co-SPV) structure (at
90% cash flows least 51% holding at Hold Co level and 51%
against
holding at SPV level; effectively minimum 26%
debt financing
holding)
Why InvIT • Hold Co / SPV can be company or LLP and should
not be engaged in any activity other than activities
80% investment pertaining to and incidental to the underlying
in revenue infrastructure projects
Accorded pass generating
• Investment in units of InvITs is allowed by resident
through status assets, hence
as well as non-resident investors
low construction
risk
SEBI regulated
framework

* Suitable for infrastructure projects like transmission towers, roads, gas pipelines, renewable energy ie where
certain degree of predictability exists on cashflows

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InvIT
Broad framework
Key responsibilities:
► Setting up the InvIT Other unitholders
Sponsors
► Appointment of trustee
(Min 5 investors)*
Min 15% Max 85%
► Undertake to transfer entire
shareholding in initial Investment
identified assets to the InvIT Manager

Key responsibilities:
► Conducts the business of the
Trustee InvIT InvIT
(Listed / Unlisted) ► Ensure compliance with the
investment conditions
Key responsibilities:
► Appoint valuer, auditor,
► Supervise Investment Manager merchant banker, etc
and Project Manager based on
Trust documents and voting of ► Issue and listing of units*
Hold Co
unitholders

≥ 51% ≥ 51% Project

Direct SPVs Multiple SPVs manager

Key responsibilities:
► Undertake 0&M of operational
projects

Assets Assets Asset

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InvIT
Parties and Qualifications
Sponsor
• ‘Sponsor’ means company or LLP or body
corporate or individual which sets up the InvIT.
• Minimum net worth requirements:
- Body corporate or company: INR 100 crore per
sponsor
- LLP – Net tangible assets of value not less than
100 crore per sponsor
• An AIF incorporated in the form of Company or
LLP is eligible to be a Sponsor
• 5 years of experience in in development of
infrastructure or fund management in infra
sector
Lock-in requirements:
• If project manager is the sponsor / associate of
sponsor for a period of minimum 3 years - 15%
for 3 years on a post-issue;
• Else - 25% for 3 years on a post-issue;
• Any holding by sponsor exceeding 15% on a post
issue basis to be held for a period of not less than
1 year from the date of listing such units
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Investment Manager Trustee
• Net worth of at least INR 10 crores in case • Registered with SEBI
of body corporate or a company or net (Debenture Trustee)
tangible assets of INR 10 crores in case of a regulations and is not an
LLP associate of sponsor/
• Minimum experience of 5 years in fund investment manager; and
management/ advisory services/
development in infrastructure sector • Sufficient resources with
respect to infrastructure,
• 2 or more key personnel, having more than personnel etc. as specified
5 years’ experience in fund management/ by the board
advisory services/ development in
infrastructure sector
• 1 or more employee who has at least 5
years experience in relevant sub-sector in
which InvIT proposes to invest
• Not less than half of its directors /
members should be independent and they
should not be directors / members of
another InvIT
• An office in India from where operations
pertaining to InvIT is proposed to be
conducted
Types of InvIT
Listing is mandatory

Funds to be raised by private placement

Privately placed listed
from institutional investors and body
InvIT
corporates only

Types of InvIT

3 2
Listing is mandatory

Privately placed
Public listed InvIT
unlisted InvIT
Funds to be raised by private
placement from institutional
investors and body corporates only

Common points:
• No lock-in restrictions for investments by NRs
• Foreign Investment shall be subject to guidelines specified by RBI

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InvIT - Key Regulations

Parameter Public InvITs Privately Placed listed InvITs Privately placed unlisted InvITs

INR 1 crore
Inr 25 crore if the privately placed InvIT INR 1 crore, irrespective of asset mix,
Min investment INR 1 lakh per investor
invests or propose to invest not less than per investor
80% of the value of InvIT assets

➢ Cumulative project size ≥ INR 500 cr

➢ Initial Offer size ≥ INR 250 cr
Investment
restrictions – asset
type ► To invest maximum of 10% in ► Minimum 80% in eligible infrastructure projects (includes “Pre-COD Projects” and
under construction eligible operating projects; Pre-COD projects – either (a) 50% physically complete or (b) 50%
infrastructure projects project cost incurred)

Maximum borrowings and deferred payments net of cash and cash equivalents - less
than equal to 49% of the value of the InvIT assets. This limit can be increased to 70% In consultation with Investors
Leverage limits
subject to compliance with certain conditions
(refer Annexure 2)
Min – 20 investors and Min – 5 investors and Min - At the discretion of the InvIT; and
No of Investors
Max – No limit Max – 1000 investors Max - 20

Maximum
investment by a 25% of the units No specified limit
single investor

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InvIT Taxation framework

Income Sponsor

Swap of shares Parity in taxation provided to Sponsors on exchange of shares of SPV for units of InvIT vis-à-vis sale of shares
of SPV under an IPO:

► Short-term capital gains on sale of units received in lieu of shares of SPV to be subject to tax at 15%* and
long term capital gains to be taxed at 10%*

► STT shall be levied on sale of such units of InvIT

• Period of holding of SPV shares to be included

• Cost of shares in specified SPV would be cost of acquisition

Swap of asset/ On swap of assets/ interest in LLP against units of InvIT

interest in LLP
► Income arising on the said swap shall be taxable as capital gains/ business income depending upon the
treatment of the assets/ interest in the LLP in the books of the Sponsor
► Typically, interest in the LLP is held as a capital asset in the books of Sponsor and should be taxed
accordingly

Eventual sale of units

► Short-term capital gains on sale of units received in lieu of assets/ interest in LLP to be subject to tax at
15%* and long term capital gain to be taxed at 10%*

► STT shall be levied on sale of such units of InvIT

* Plus applicable surcharge & education cess

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InvIT Taxation framework
Income SPV
Interest ► Tax deduction on interest
payout available at SPV level
► No WHT obligations on interest
paid by SPV to InvIT
Dividend Distribution from SPV to Hold Co
► No DDT payable after 1 April
2020
► No withholding tax by SPV on
distribution to Hold Co
* Plus applicable surcharge & education cess
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InvIT Unit holders
(including sponsor)
Interest income received from SPV ► NR – 5%* concessional rate
► Not taxable and accorded a pass
through status upon distribution ► Resident – Applicable rate
Income distribution to unit holders in the
nature of interest
► WHT in the case of:
► NR – 5%*
► Resident -10%
Dividend income received from SPV / Taxable in the hands of the
Hold Co unitholders
► Not taxable and accorded a pass
through status upon distribution
InvIT Taxation framework

Income SPV InvIT Unit holders

Capital gains ► Taxable as per normal Capital gains on sale of asset/ shares
provisions of the Act (unlisted) of SPV
► Taxable for InvIT
► LTCG (more than
3 years) on disposal of assets –
20%* (with indexation benefit)
► STCG (3 years/ less) – MMR
(including sponsor)
Income distribution from InvIT in the
nature of capital gains –
► Tax exempt
Capital gains on sale of units in InvIT
► Treatment as LTCG (more than
3 years) on sale of units – 10%*
► STCG (3 years/ less) – 15%*
Provided sale is through listed stock
exchange and STT is paid

Treaty benefits available to NR

* Plus applicable surcharge & education cess

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Thank you