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Amendments made by Finance Act of 2013: Acknowledging various representations of the industry in this regard, in order to facilitate the securitization process and address this controversy, the Finance Act 2013 provided a special taxation regime in respect of taxation of income of securitization entities, set up as a trust, from the activity of securitization. The salient features of the regime were as follows:

 

Ø  In case of securitization vehicles set up as a trust and the activities of which were regulated by either SEBI or the RBI, the income from the activity of securitization was exempt from taxation.

 

Ø  The securitization trust (ST) was liable to pay income tax on income distributed to its investors on the line of distribution tax levied in the case of mutual funds. The income tax was levied at 25% in case of distribution being made to individual investors and Hindu Undivided Families, and at 30% in other cases. No income tax was payable if the income distributed by the ST was received by a person exempt from tax under the domestic tax law (such as mutual funds).

 

Ø  Consequent to the levy of distribution tax, the distributed income received by the investor was exempt from tax.

 

Concerns not addressed by Finance Act 2013:

 

Ø  The distribution received by the PTC holders attracted taxation on a gross basis at a significantly high rate of 30% (for taxpayers other than individuals and a Hindu Undivided Families).

 

Ø  As the income received by PTC holders was exempt from tax, according to the provisions of the domestic tax laws, a disallowance of expenses incurred in relation to this income would have to be made by the PTC holders in their tax returns.

 

Ø  Trusts set up by reconstruction companies or securitization companies were not covered (although such trusts also engaged in securitization activities). These companies were established for the purposes of the securitization and reconstruction of financial assets and the enforcement of the SARFAESI Act, with the RBI regulating their activities.

 

Amendments made by Finance Act 2016:

To address the concerns arising from the tax regime of Finance Act 2013, the Finance Act 2016 has replaced the special regime for Securitisation Trusts with the following:

Particulars

Amendments by Finance Act 2016

Date of applicability

1.6.2016

Nature of Securitisation Trusts covered

Ø  SEBI-regulated funds for securitisation of debt or receivable.

Ø  As defined in the guidelines for securitisation issued by RBI.

Ø  An ARC in accordance with SARFAESI Act or in pursuance of any guidelines or directions issued for the said purpose by the RBI.

Ø  Security receipts have been included in the definition of securities. Any investor who holds securities, issued by securitisation trusts shall be considered investor for the purpose of this chapter.

Availability of pass-through status to securitisation trusts

Yes

Whether distributed income is deemed to be credited to investors at the end of the year.

Yes

Whether investor enjoy exemption on distributed income

As per section 115TCA, notwithstanding anything contained in the Income Tax Act, any income accruing or arising to, or received by any person, being an investor of a securitisation trust, out of investment made in the securitisation trust, shall be chargeable to income tax in the same manner as if it were the income accruing or arising to, or received by, such person, had the investments by the securitisation trust been made directly by him.

Distribution tax payable by securitisation trust (ST)

As per Section 115TA(5), the distribution tax as provided for in this section shall not be applicable for income distributed by the trust to its investors on or after 1.6.2016.

Withholding tax obligation on STs while making payment to investors (Newly introduced Section 194LBC)

Ø  25% in case payment is made to individuals or HUF

Ø  30% in other cases.

Ø  Rates in force (rate under the relevant tax treaty or under domestic law, whichever is beneficial) in case of payments to non-resident investors

Whether investor can apply for nil/lower deduction withholding certificate

Yes.

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