Union finance minister P Chidambaram in his budget 2013 has decided to exempt the Securitisation Trust from Income Tax. This will facilitate the financial institutions to securitise their assets through a special purpose vehicle.
This has bought in clarity and relief to investors particularly mutual funds that had stopped investing in pass through certificates because of tax implications.
Tax shall be levied only at the time of distribution of income by the Securitisation Trust. "In case, the recipient is a company, tax rate will be 30 % and in case of an individual or HUF, it will be 25 %. If it is an exempt category of investors like MFs, no tax will be applicable," said a senior official of a private bank.
HDFC executive director V S Rangan too feels the move will encourage high networth individuals as well as the country's mutual funds to enter into securitisation transactions. "Tax calculations for investors such as companies, foreign institutional investors would be different. Investors who have to take deduction on account of interest paid and other charges, the same will not be allowed under Section 14A of Income Tax Act as the income received by them from Securitisation Trust is proposed to be exempt from tax," Rangan pointed out.
It would also help ailing microfinance institutions sell micro loans and generate liquidity. Some like consultant Vinod Kothari feel it will be difficult to implement the provision. "If the securitisation trust distributes the principal, but retains income, it may amount to creating a tax shelter.
The Trust may go on paying off principal, retain interest and distribute interest only at the end of the term. Also, in case of revolving type of transactions, the Trust may continue to revolve income as well as principal, and may, therefore, avoid paying tax right till the end of the term of the transaction," he said.
Presently, tax provisions regarding securitisation transactions is contained in several sections - 10 (23D), 10 (35A), and 115TA, 115TB and 115TC including a new set of provisions in Section 115TA and 115TB.
The pro-vision in Section 115TA obliges the securitisation Trustee to pay 0 % tax in case of assessees whose income is exempt from tax (primarily MFs), 25% in case of income received by an individual, and 30% in case of in-come received by any other assessee.
Some of the other difficulties in applying Section 115TA, industry feels, will arise if income is not distributed, or if the investor transfers the securities.