Budget 2022: Invited taxation measures likely to attract FII and retail investors

The government is considering tax incentives to invest in Infrastructure Investment Trusts (InvITs) to make them more attractive to both individual and foreign investors, and to give an opportunity to finance big-ticket infrastructure projects in line with the “Gatishakti” scheme.

One suggestion is to adjust the capital gains system including rates.

InvITs are private trust funds created to facilitate the participation of individual and institutional investors in infrastructure projects. In return, investors can earn a small portion of the income.

However, under the current tax standard, an investor in InvITs is required to pay a 15% short-term capital gains tax (STCG) on gains made on the sale of units within three years of their purchase. For units sold after three years, profit is subject to Long Term Capital Gains Tax (LTCG) at 10%, if gains exceed ₹1 lakh.

Infrastructure projects will continue to be an area of ​​focus for 3-4 years. “Infrastructure investment funds have generated a lot of interest,” a senior Finance Ministry official said, adding that there were discussions about making them more attractive by adding some tax incentives.

Suggestions in this regard have come from many infrastructure players and foreign investors.

Another official said during the meeting of international fund managers with Prime Minister Narendra Modi, a notable proposal was to reduce the long-term and short-term capital gains tax so that many large institutional players can participate for a longer period due to the fact that these projects take longer periods to complete.

The official added that the size of the tax incentives is still being studied and a final decision on the proposal will be made soon

InvITs have emerged as a preferred path for private equity investors to hold operational infrastructure assets and for infrastructure developers to monetize their investment in these projects.

In 2020-21, ₹4,0432 crore was raised by InvITs and ₹14,300 crore by Real Estate Investment Trusts (REITs), according to Sebi data.

The government sees this vehicle as having greater potential, especially for highway and energy projects.

This move is expected to direct much-needed liquidity to infrastructure projects with better credit quality while at the same time helping to improve governance and accountability in these projects.

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