Securitisation provisions - Providing Certainty & Clarity.

INTRODUCTION

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.

BACKGROUND

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]

PROVISIONS OF THE FINANCE BILL, 2013

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.

CONCLUSION

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)

Widening tax net on immovable property transactions - Curbing Speculation?

The Hon’ble Finance Minister had a very daunting task this time, on one hand he had to keep in mind the elections due next year and on the other hand the interest of the foreign investors.

Against this backdrop and in an attempt to address the fiscal deficit and increase revenue collection, the Finance Minister laid out the tax proposals.

Certain key proposals were made from a direct tax perspective in connection with sale & purchase transactions of immovable properties.

Sale of immovable properties within the ambit of TDS

As per the existing tax laws, payments made to non-residents for transfer of immovable property were liable to TDS.  However, transactions for sale of immovable properties to residents were outside the purview of TDS except in the case of compulsory acquisition of immovable properties.

Owing to the lack of appropriate provisions and with a view to improve the reporting of such sale transactions and prevent leakage of revenue for the exchequer, it has been proposed to insert section 194?IA which provides that every transferee, at the time of payment or crediting any sum as consideration for transfer of immovable property to a resident transferor, shall deduct tax at the rate of 1% on such consideration.

The proposed amendments are not applicable to transfer of agricultural land and transactions where the total amount of consideration for the transfer of an immovable property is less than INR 50 lacs.

Practical difficulties are likely to be faced by the deductors as they would be required to obtain a TAN even if for a single transaction, to file e-TDS statements.

The aforesaid amendment shall be effective from 1 June 2013.

Valuation mechanism for sale of land or building held as stock-in-trade prescribed

The existing tax laws have enabling provisions to tax the event regarding conversion of capital assets into stock-in-trade.  Once such stock-in-trade (i.e. converted assets) are transferred, the gains arising is taxable as business income as per the provisions of section 45(2) read with section 28. Further, any transfer of capital asset being land or building was subjected to valuation by the stamp valuation authorities in view of the express provisions of section 50C.

In transactions involving sale / purchase of immovable property (other than capital asset), the Finance Minister has proposed to insert section 43CA which states that where consideration for transfer of land or building or both not being a capital asset is less than the stamp duty value (adopted, assessed or assessable), then such stamp duty value shall be deemed to be the full value of consideration. Where the agreement for fixing the consideration for transfer and registration of such transfer is on different dates, then stamp duty value on the date of agreement for transfer is to be considered.

Further, it has also been proposed that if any consideration or a part thereof is received on or before the date of agreement for transfer, then the stamp duty value to be adopted, would be the value applicable on the date of the agreement of transfer.

The assessing officer may refer the matter to the Valuation Officer if the assessee claims that the stamp duty value exceeds the fair market value of the property and such stamp duty valuation has not been disputed before any court or authority.

The aforesaid section shall be effective from assessment years 2014-15 and subsequent assessment years.

Immovable property for inadequate consideration received by an individual or HUF brought back in the tax net

Before the Finance Act 2010, the provisions of section 56(2)(vii)(b) which provided for taxing an event of transfer of immovable property at a lower or for Nil consideration, is summarized as under:

The Finance Act 2010 had deleted the above clause (ii) and accordingly, amended the provisions of section 56(2)(vii)(b) to tax the event of transfer of any immovable property in the hands of recipient as income from other sources if the property has been received without consideration and the stamp duty value of such property exceeded fifty thousand rupees.

The Finance Bill 2013 has restored the above provisions for taxing transfer of immovable properties for inadequate consideration by an individual or HUF.

Where the agreement for fixing the consideration for transfer and the registration of such transfer is on different dates, then stamp duty value on the date of agreement for transfer is to be considered.

Further, it has also been proposed that if any consideration or a part thereof is received on or before the date of agreement for transfer, then the stamp duty value to be adopted, would be the value applicable on the date of the agreement for transfer.

The aforesaid amendment shall be effective from assessment years 2014-15 and subsequent assessment years.

Definition of agricultural land amended

Presently, for the purposes of defining ‘agricultural income’ and ‘capital asset’, land is inter-alia considered to be ‘agricultural land’ if the same is located:

The second clause stated above is proposed to be amended to provide that a land will be considered as agricultural land if it is located in any area, within the aerially measured distance of:

The term ‘population’ has also been defined to mean population according to the last preceding census of which the relevant figures have been published before the first day of the previous year.

Similar amendments have also been proposed in respect of the definition of urban land in the Wealth-tax Act, 1957.

In fact this is a good measure on the part of the Finance Minister to stop any tax leakage on people taking recourse to exclusion of agricultural land!

The aforesaid amendment shall be effective from assessment years 2014-15 and subsequent assessment years.

Some of the above amendments are an obvious move to curb speculation and bring about improved reporting and accountability in high-value immovable property transactions.  Considering that the TDS is to be charged on the gross transaction value rather than net gains, sellers will have a cash-flow impact in situations where the sales are at a loss or at zero / negligible gains. 

Availing Investment Allowance Incentive - " Practical Challenges & Solutions.

Union Budget 2013 has focussed on few but important measure to promote socio economic growth. Promoting the industrial activity both in manufacturing of the plant and machinery and use of such plant and machinery would propel such socio economic growth in terms of accelerated industrialisation as well as in employment generation. Accordingly, it is proposed that an eligible company will be entitled for following Incentives on acquisition and installation of new plant or machinery and Sec.32AC has been introduced for the purpose.
 
a)      FY 13-14 : Deduction @ 15% once it invests Rs.100 Crs in P&M  in FY 13-14 or
b)      FY 14-15: Deduction @ 15% upon value of investment exceeding Rs.100 Crs in FY 13-14 & FY 14-15( in aggregate) as reduced by such deduction availed in FY 13-14.
 
According to an article published in a leading business news paper “about 217 out of 570 listed manufacturing companies spent an amount exceeding Rs100 Cr” which may be the reason behind introduction of this section to confer the benefit to the manufacturing sectors.
 
Some of the aspects of these provisions need critical analysis to understand the provision in its true spirit which is as follows:
a)      Eligible Company: A company which is engaged in manufacture or production of article or thing is regarded as an eligible company to get these  benefits.
b)      Manufacture: The word ‘manufacture’ has not been defined in Sec.32AC. However, Sec.2 (29BA) defines the term manufacture to mean a change in a non living physical object or article or thing resulting in transformation of the object or thing into a new thing or with a different chemical composition or structure.
c)      Article or thing: Manufacture or Production of article or thing has been subject to continuous litigation from the time profit linked incentives and location based incentives have been place. Courts, vide various judgments have laid down the principles that activities like mere processing, assembling will not be eligible to be categorised as manufacture of article or thing. Similarly companies engaged in power generation   may also not be construed as engaged in manufacture.
 
The other aspect of the eligibility criteria is that the assessee must ‘acquire and install’ the new plant and machinery. In order to claim the investment allowance assessee must not only acquire the asset but also install the P&M in the same financial year to be eligible for investment allowance. At the same time, if any P&M has been already purchased in FY 12-13 but lying in Capital WIP pending installation, same will not be eligible for investment allowance in FY 13-14 simply on installation.
 
At present some business houses are of the view that, acquiring and installing P&M worth of Rs. 100 Crs plus in a span of two years will be very difficult considering a shorter timeframe available to them.
 Refer the following example for a better understanding:

                                                                                                                                       Rs.Crs

 
From the example it can be understood that even if one is not able to achieve the P&M investment of Rs.100 Crs in first year (FY 14), still if the aggregate of investment of FY 14 and FY 15 exceeds Rs.100 Crs, one can get investment allowance @15% in FY 15.
Further considering the fact that erstwhile investment allowance u/s 32A was in place from FY 76 to FY 90 , one can optimistically assume that the provision of Sec.32AC may get extended beyond FY 15. Hence aggregating the overall investment over consecutive two years on a rolling over basis will be key to avail investment allowance on a continuous basis. Direct Tax Code also provides for benefits for investment incentives.
 
Unlike depreciation provision u/s.32, Se.32AC does not reduce depreciation rate by   50% in case asset is used for less than 180 days in a financial year. Hence, even if an asset is acquired and installed even in the month of March, will be eligible for Investment allowance.
 
‘Use’ of asset as stipulated u/s 32, is not a criteria as per Sec.32AC. Hence, only ‘acquisition and installation’ of an asset will be sufficient for getting benefit u/s 32AC.
 
While acquisition of an asset can always be substantiated by purchase invoice, ‘installation’ of the asset will hold key to establish claim u/s 32AC. Installation report by internal qualified engineer will suffice the purpose. Ideally, such installation certificates must be attached to the asset capitalisation document in a ‘soft form’ in a SAP environment. 
 
Sale of the asset within 5 years from the date of its ‘installation’ (not from date of ‘acquisition’) will require the assessee to offer the incentive so availed as Business Income in the year of such sale. Hence keeping track of date of ‘installation’ is critical to ensure right treatment of tax both in the year of availing tax incentive and also in the year of sale.
 
Let me summarise the key challenges a corporate is likely to face and the ways to handle this:

 
There might have been certain  positives and negatives in Union Budget FY 13, but  I could clearly infer FM telling that  offering investment allowance incentive to manufacturing sector  is yet another way to say ‘WE CARE’.
 
 
(The views expressed above are author’s personal views. )