F.—Special provisions relating to pass-through entities
Tax on income from securitisation trusts.
221(1)
Irrespective of anything contained in this Act, where a person being an investor of a securitisation trust, receives any income or any income accrues or arises to him, out of investments made in the securitisation trust, such income 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.
221(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 person referred to in sub-section (1), as if it had been received by, or had accrued or arisen to, the securitisation trust during the tax year.
221(3)
The income accruing or arising to, or received by, the securitisation trust during a tax year, if not paid or credited to the person referred to in sub-section (1), shall be deemed to have been credited to the account of the said person––
- (a) on the last day of the tax year; and
- (b) in the same proportion in which such person would have been entitled to receive the income had it been paid in the tax year.
221(4)
The person responsible for crediting or making payment of the income on behalf of securitisation trust, and the securitisation trust, shall furnish, within such period, as prescribed, to the person who is liable to tax in respect of such income and to the prescribed income-tax authority, a statement in such form and verified in such manner, giving details of the nature of the income paid or credited during the tax year and such other relevant details, as prescribed.
221(5)
Any income which has been included in the total income of the person referred to in sub-section (1) in a tax year, on account of it having accrued or arisen in the said tax year, shall not be included in the total income of such person in the tax year in which such income is actually paid to him by the securitisation trust.
221(6)
In this section,—
- (a) “investor” means a person who is holder of any securitised debt instrument or securities or security receipt issued by the securitisation trust;
- (b) “securities” means debt securities issued by a Special Purpose Vehicle as referred to in the guidelines on securitisation of standard assets issued by the Reserve Bank of India; (c) “securitised debt instrument” shall have the same meaning as assigned to it in regulation 2(1)(s) of the Securities and Exchange Board of India (Public Offer and Listing of Securitised Debt Instruments) Regulations, 2008 made under the Securities and Exchange Board of India Act, 1992 and the Securities Contracts (Regulation) Act, 1956;
- (d) “securitisation trust” means a trust, being a— (i) “special purpose distinct entity” as defined in regulation 2(1)(u) of the Securities and Exchange Board of India (Public Offer and Listing of Securitised Debt Instruments) Regulations, 2008 made under the Securities and Exchange Board of India Act, 1992 and the Securities Contracts (Regulation) Act, 1956 and regulated under the said regulations; or (ii) “Special Purpose Vehicle” as defined in, and regulated by, the guidelines on securitisation of standard assets issued by the Reserve Bank of India; or (iii) trust set-up by a securitisation company or a reconstruction company formed, for the purposes of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, or in pursuance of any guidelines or directions issued for the said purposes by the Reserve Bank of India, which fulfils such conditions, as prescribed;
- (e) “security receipt” shall have the same meaning as assigned to it in section 2(1)(zg) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
Section Summary:
This section deals with the taxation of income received by investors from securitisation trusts. A securitisation trust is a legal entity that pools financial assets (like loans) and issues securities backed by these assets. The section ensures that income from such trusts is taxed in the hands of the investor as if they had directly earned it, rather than being taxed at the trust level. This is part of the pass-through entity treatment, where the income "passes through" the trust to the investor.
Key Changes:
- Direct Taxation of Investors: Previously, the tax treatment of income from securitisation trusts was not explicitly outlined. This section clarifies that income from such trusts is taxable in the hands of the investor, not the trust itself.
- Deemed Credit of Income: Even if the income is not actually paid to the investor during the tax year, it is deemed to have been credited to them on the last day of the tax year.
- Reporting Requirements: The section introduces specific reporting obligations for the securitisation trust and the person responsible for crediting income to investors.
Practical Implications:
- For Investors: Investors in securitisation trusts must report income from these trusts in their tax returns, even if the income is not physically received during the tax year. This could lead to advance tax liabilities.
- For Securitisation Trusts: Trusts must provide detailed statements to investors and tax authorities about the nature and amount of income credited or paid.
- Avoidance of Double Taxation: Income included in the investor’s tax return for a particular year (due to deemed credit) will not be taxed again when it is actually paid.
Critical Concepts:
- Securitisation Trust: A trust that pools financial assets (like loans) and issues securities backed by these assets. It acts as a pass-through entity, meaning income is taxed at the investor level, not the trust level.
- Deemed Credit: Even if income is not physically paid, it is considered credited to the investor on the last day of the tax year.
- Pass-Through Treatment: The trust itself is not taxed; instead, income is taxed directly in the hands of the investors.
Compliance Steps:
- For Investors:
- Include income from securitisation trusts in your tax return for the year it is deemed credited, even if not physically received.
- Ensure you receive the required statement from the securitisation trust detailing the income credited.
- For Securitisation Trusts:
- Provide detailed statements to investors and tax authorities within the prescribed time frame.
- Ensure accurate reporting of the nature and amount of income credited or paid.
Examples:
- Scenario 1: An investor holds securities issued by a securitisation trust. During the tax year, the trust earns ₹10 lakh in income but does not distribute it. Under this section, the ₹10 lakh is deemed credited to the investor on the last day of the tax year. The investor must include this ₹10 lakh in their tax return for that year, even though they did not physically receive it.
- Scenario 2: In the following year, the trust distributes ₹10 lakh to the investor. Since this amount was already taxed in the previous year (due to deemed credit), it will not be taxed again in the year of actual receipt.
This section ensures clarity and consistency in the taxation of income from securitisation trusts, aligning it with the pass-through entity principle.