New Taxation Regime for Securitisation Trusts [Section 115TCA] :

Related amendment in sections: 115TA, 115TC & 10(35A)

(i) Chapter-XII-EA of the Income-tax Act, 1961 comprising of sections 115TA, 115TB and 115TC provides for a special taxation regime in respect of income of the securitisation trusts and the investors of such trusts.

(ii) As per the special taxation regime, the income distributed by the securitisation trust to its investors would be subject to a levy of additional tax to be paid by the securitisation trust within 14 days of distribution of income.

(iii) The rate of additional income-tax is 25%, if the distribution is made to an individual or a Hindu undivided family (HUF) and @30%, if the distribution is to others. However, no distribution tax is to be levied, if the distribution is made to an exempt entity. Consequent to the levy of additional income-tax, the income of the investor, received from the securitisation trust, is exempt under section 10(35A) and the income of securitisation trust itself is exempt under section 10(23DA).

(iv) Under this special taxation regime, the trusts set up by reconstruction companies or the securitisation companies were not covered although such trusts are also engaged in securitisation activity. These companies are established for the purposes of the
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) and their activities are regulated by the RBI.

(v) Also, under this regime, the final levy in the form of distribution tax is tax inefficient for the investors, specially the banks and financial institutions. Disallowance of expenditure in respect of income received from securitisation trust increases the effective rate of taxation for these investors. Further, the non-resident and resident investors could not take benefits of their specific tax status.

(vi) In order to rationalise the tax regime for securitisation trust and its investors, and to provide tax pass through treatment, a new taxation regime has been introduced by insertion of section 115TCA with effect from A.Y.2017-18 and the earlier regime of distribution tax under section 115TA shall cease to apply in case of distribution made by securitisation trusts with effect from 1st June, 2016.

(vii) Salient Features of the New Taxation Regime for Securitisation Trust and its investors [New Section 115TCA]:

(1) Applicability of New Taxation Regime [Clause (d) of Explanation below section 115TCA]:

The new regime shall apply to a securitisation trust being:

	Form	Regulation
(i)	A special purpose distinct entity	SEBI (Public Offer and Listing of Securitised Debt Instrument) Regulations, 2008
(ii)	A special purpose vehicle	The guidelines on securitisation of standard assets issued by RBI
(iii)	A trust setup by a securitisation company or a reconstruction company	Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) (or) The RBI directions/guidelines.

 

(2) Exemption of income of securitisation trust from the activity of securitisation:

The income of securitisation trust from the activity of securitisation shall continue to be exempt under section 10(23DA).

(3) No exemption under section 10(35A) to investor:

However, exemption in respect of income of investor from securitisation trust under section 10(35A) would not be available in respect of distributed income received by them on or after 1.6.2016. Thereafter (i.e., on or after 1.6.2016), any income received from securitisation trust would be taxable in the hands of investors.

(4) Taxability of income from securitisation trust in the hands of the investor [Section 115TCA(1)]:

New section 115TCA(1) provides that the income accruing or arising to, or received by, a person, being an investor from the securitisation trust, out of investments made in the securitisation trust, shall be taxable in the hands of investor in the same manner and to the same extent as if the investor had made investment directly in the underlying assets and not through the trust.

(5) Nature of income paid or credited by securitisation trust in the hands of the investor [Section 115TCA(2)]:

The income paid or credited by the securitisation trust shall be deemed to be of the same nature and in the same proportion in the hands of the investor of the securitisation trust, as if it had been received by, or had accrued and arisen to, the securitisation trust during the previous year.

(6) Deemed credit to investor [Section 115TCA(3)]:

If the income accruing or arising to, or received by, the securitisation trust, during a previous year has not been paid or credited to the investor, the same shall be deemed to have been credited to the account of the said person on the last day of  the previous year in the same proportion in which such person would have been entitled to receive the income had it been paid in the previous year.

(7) Statement specifying the details of nature of income to be furnished to investor and prescribed income-tax authority [Section 115TCA(4)]:

The securitisation trust shall provide breakup regarding nature and proportion of its income and such other relevant details to the investors and also to the prescribed income-tax authority in the prescribed form and verified in the prescribed manner, within the prescribed period.

(8) Income taxed in the year of accrual not taxable again in the year of payment [Section 115TCA(5)]:

Where income has been included in the total income of the investor in a previous year, on account of it having accrued or arisen in the said previous year, the same shall not be included in the total income of such person in the previous year in which such income is actually paid to him by the securitisation trust.

(9) Deduction of tax at source in respect of income payable to investor [New Section 194LBC effective from 1.6.2016]:

Tax deduction at source under section 194LBC shall be effected by the securitisation trust at the time of payment or credit of income to the account of the investor, whichever is earlier.

	Form	Regulation
(i)	Resident individuals and HUFs	25%
(ii)	Resident payees, other than individuals and HUFs	30%
(iii)	Non-corporate non-residents and foreign companies	Rates in force

 

(10) The facility for the investors to obtain low or nil deduction of tax certificate would be available; the investor can make an application to the Assessing Officer, and he can, on an application made by the assessee in this behalf, issue a certificate under section 197 in this behalf for no deduction of income-tax or deduction of income-tax at a lower rate