Expert Corner

Mr. Anish Thacker, Partner, E&Y
Securitisation provisions - Providing Certainty & Clarity.


One of the relief and welfare measures in the Finance Bill, 2013, as per the Memorandum explaining its provisions, relates to taxation of securitisation trusts. Before we touch upon the proposals, let us take a step back and look at their current tax situation.


Securitisation Trusts [ i. e. securitisation vehicles set up as trusts and regulated by the Securities and Exchange Board of India ( SEBI) or the Reserve bank of India ( RBI) ] invite investments from financial players typically Mutual Funds and Non Banking Finance Companies ( NBFCs)  into debt that banks and other financial institutions want to take off their balance sheets. These trusts usually issue ‘ pass thru certificates ( PTC) to the mutual funds / NBFCs which are interested in taking exposure to a part of the receivables but, which do not either have the wherewithal  or the appetite to take exposure to the entire amount of these receivables.

In the recent past, the tax authorities have raised questions on (a) whether such trusts are the real ‘ owners’ of the receivables or are they ‘ conduits’ for the real owners which are the Mutual Funds / NBFCs and (b) whether the income that these trusts receive is taxable under the head ‘ Profits and  Gains of Business or Profession’ . The stand taken by the tax authorities is that the trusts do earn ‘ business income’ and therefore the said income has to be taxed at the maximum marginal rate. This caused difficulties to the holders of the PTC, particularly Mutual Funds whose income was exempt from tax. The Mutual Funds and the trustees of the securitisation trusts contended ( rightly) that under the scheme of taxation of trusts under the Act, a trustee of a trust is taxed in a like manner and to the same extent as the beneficiaries and since in their view, the income that the securitisation trusts received was not ‘ business income’ , since the trust did not carry on ‘ business’ , the income from the PTCs ought not to have been taxed at all.

The tax authorities however did not accept this contention and proceeded to tax the said income at maximum marginal rate and recover the tax demand they determined initially from the trustees, and since in some cases, the trustees could not pay the tax ( since the income was already distributed to the beneficiaries ) from the beneficiaries. The Mutual Funds which were the beneficiaries approached the Bombay High Court by filing writ petitions. The Bombay High Court granted the stay of demand[1]


The Finance Bill, 2013 seeks to introduce sub section 23 DA in section 10 of the Act providing for exemption of income of the securitisation trusts. At the same time, it seeks to introduce Chapter XII – EA, containing new sections 115TA to 115TC of the Act which inter alia provide that the income distributed/ paid by a securitisation trust shall be chargeable to tax and the securitisation trust shall be liable to pay additional income- tax on such distribution at the rate of :-

(i ) 25% of  the amount of income distributed to an individual / HUF.

( ii) 30% of the amount of income distributed to any other person.

If however, the income is distributed to a person whose income, irrespective of its nature and source, is not chargeable to tax under the Act, then the securitisation trust is not liable to pay additional income –tax to the extent of income distributed / paid to such person.

The additional income – tax mentioned above, would be required to be paid into the Government treasury within 14 days of distribution/ paid whichever is earlier.

The Finance Bill also proposes to introduce sub- section 35A to section 10 of the Act to provide that any income received by an investor of a securitisation trust in respect  of which additional income –  tax is paid / payable/ not payable in specified circumstances, will be exempt  from tax in the investor’s hands.

The net effect of these proposals  will be that the tax on income from securitisation, to the extent it pertains to ‘ taxable’ investors, will be collected from the securitisation trust by way of additional income –  tax on distributions. To the extent that the income pertains to the beneficiaries whose income is not chargeable to tax irrespective of the nature and source , it will not be taxed.


The introduction of these provisions is laudable as they seek to provide certainty and clarity in the taxation of income from securitisation and insulate this income from the uncertainty created by the tax authorities as mentioned above. Taxing income at the distribution stage also eliminates uncertainty over deductibility of trustees’ expenses of collection and administrative expenses. A couple of points to ponder on this would be (a) whether income of Mutual Funds is ‘ not chargeable to tax’ ( though it has been so mentioned in the Memorandum explaining the provisions of the Finance Bill, 2013 ) or ‘ chargeable to tax’ but not includible in the total income under Chapter III of the Act  and (b) possible unintended consequences of section 14A of the Act that may arise to investors which effectively suffer additional income – tax under section 115TA of the Act. Attention to these and suitable clarifications ought then to lay all uncertainty to rest and provide ‘ security’ to players in the securitisation industry from any ‘ collateral damage’, players may suffer.

[1] See UTI Mutual Fund v. ITO [ 2012] 345 ITR 71 ( Bom)