AMFI- Association of Mutual Funds in India
BUDGET
PROPOSAL FOR FY 2018-19
Securitisation Trust
Background
•
The Finance Act
2013 rolled out a special taxation regime to facilitate the securitization
process, in respect of income of securitization entities set up as a “Trust” from
the activity of securitization of assets. The income of these Special
Purpose Vehicles (SPV) set up as trusts are exempted from taxation whose
activities are regulated either by SEBI or RBI.
• There have been several challenges as regards SPVs set
up as “Trusts”. The Income Tax officers in certain cases have contended that a
trust set up as a securitization Special Purpose Vehicle (SPV) was not a valid
trust and constituted as Association of Persons (AOP) and cannot avail of ‘Pass
Through’ status for taxation.
• This is notwithstanding the fact that such trusts have
been set up in compliance with the Guidelines of Securitization of Standard
Assets issues by Reserve Bank of India.
• In the current ongoing litigation, the Income Tax
Department has challenged the structure of “Trust” and has contended this as an
Association of Person (AOP) by citing procedural issues in the formation of the
Trust. If this view is ultimately upheld, section 115 TCA of the Act is feared
to not become applicable (which
provides for the income accruing or arising to an investor of a securitisation
trust out of investments made in the securitisation trust shall be taxable in
the same manner as if it would be the income of the person had the investments
made by the securitisation trust, been made directly. This is because, if the view expressed by the CIT(A),
that the income from the originator is not income of the ‘securitisation
trust’, but that of the ‘ AOP’ of the PTC holders’ then. Consequently, the
taxation of the whole of the income (including income receivable by mutual
funds) would be taxed at ‘full rates’. This would obviously not be in the
interest of the mutual funds.
•
• As per the Explanation in Chapter XII-EA, CBDT was to
prescribe the eligibility conditions for a trust to qualify as a Securitisation
Trust. The requirement was originally introduced in the year 2013-14. However,
CBDT is yet to prescribe the conditions. This leaves ambiguity about the tax
treatment in respect of securitization trust already formed under RBI
guidelines, and uncertainty in the event CBDT prescribes some conditions with
retrospective effect
Proposal
It is proposed that the words
‘Securitisation Trust’ in Section 115TA of the Income-tax Act be replaced by ‘Securitisation
Special Purpose Vehicle’, which is regarded as a securitization special
purpose vehicle either under the guidelines on securitization brought out by
the Reserve Bank of India or the Securities and Exchange Board of India.
It is also proposed that in
the Explanation in Chapter XII-EA the words “which fulfills such conditions, as
may be prescribed” may be deleted.
For clarity and removal of doubt and avoidance of
litigation, conditions to be fulfilled by a securitization trust may
please be
prescribed.
Justification
The RBI guideline clause 5(ix)
defines a SPV to mean a company, trust or other entity constituted for a
specific purpose.
This clearly highlights and
accepts other forms of SPV other than trusts.
Section 115TCA introduced by
the Finance Act, 2016 specify the provisions on the taxation treatment of
investors in a Securitization Trust to increase penetration in the
securitization market. This cannot be achieved as the current tax provisions
lack clarity on the eligibility of a securitisation trust.
As there has been avoidable litigation regarding the
securitisation trust formed earlier, the conditions under section 115TC may be
prescribed with prospective applicability.
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