Levy of additional income-tax on income distributed by securitization trusts [Chapter XII-EA] :

Related Provisions:

Section 10(23DA)	Exemption of any income of a securitization trust from the activity of securitization
10(35A)	Exemption of the distributed income referred to in section 115TA received from a securitization trust in the hands of the recipient-investor

(i) Securitization trusts are special purpose entities set up in the form of trust to undertake securitization activities.

(ii) For the purpose of the exemption and taxability provisions under the Income-tax Act, 1961, a “securitization trust” means a trust which is a special purpose distinct entity or special purpose vehicle, the details of which are tabulated hereunder, which fulfills the prescribed conditions –

	Form of trust	Regulation/ Guidelines	Definition under the respective Regulation/Guidelines
(1)	Special purpose distinct entity	SEBI (Public Offer and Listing of Securitised Debt Instruments) Regulations, 2008.	Special purpose distinct entity means a trust which acquires debt or receivables out of funds mobilized by it by issuance of securitised debt instruments through one or more schemes, and includes any trust set up by the National Housing Bank or by the NABARD. For this purpose, “securitised debt instrument” means any certificate or instrument, by whatever name called, issued to an investor by any issuer being a special purpose distinct entity which possesses any debt or receivable, including mortgage debt, assigned to such entity, and acknowledging beneficial interest of such investor in such debt or receivable including mortgage debt, as the case may be;
(2)	Special purpose vehicle (SPV)	The guidelines on securitization of standard assets issued by RBI.	SPV means any company, trust, or other entity constituted or established for a specific purpose – (a) activities of which are limited to those for accomplishing the purpose of the company, trust or other entity as the case may be; and (b) which is structured in a manner intended to isolate the corporation, trust or entity as the case may be, from the credit risk of an originator to make it bankruptcy remote

(iii) Due to the absence of specific provisions governing the taxation of such trusts under the Income-tax Act, 1961, these special purpose entities set up in the form of trusts to undertake securitisation activities experienced genuine hardship. The taxation at the maximum marginal rate under section 161 applicable in the case of a trust having income under the head “Profits and gains of business or profession” was viewed to be restrictive specifically where the investors in the trust are persons which are exempt from taxation under the provisions of the Income-tax Act, 1961 (for example, mutual funds).

(iv) Therefore, in order to overcome this restrictive factor and facilitate the securitisation process, a special taxation regime has been introduced in respect of taxation of income of securitisation entities, set up as a trust, from the activity of securitisation.

The significant provisions of the special regime are :-

(1) In case of securitisation vehicles which are set up as a trust and the activities of which are regulated by either SEBI or RBI, the income from the activity of securitisation of such trusts will be exempt from taxation. Section 10(23DA) exempts any income of a securitization trust from the activity of securitization.

(2) Chapter XII-EA, comprising of sections 115TA, 115TB and 115TC, levies additional income tax on securitization trusts in respect of income distributed to its investors.

(a) The securitisation trust will be liable to pay additional income-tax on income distributed to its investors [Section 115TA].

(i) The rates of additional income-tax and the effective rate of tax (i.e., including surcharge@12% and cess@3%) in respect of each category are shown hereunder –

	Category of investors to whom income is distributed	Rate	Effective rate of tax
(1)	Persons, in whose case, income, irrespective of its nature and source, is exempt from tax under the Income-tax Act, 1961 [for example, mutual funds exempt under section 10(23D)]	Nil	Nil
(2)	Individuals and HUFs	25%	28.84%
(3)	Other Investors [i.e., investors other than mentioned in (1) and (2) above]	30%	34.608%

(ii) Such tax has to be paid within 14 days from the date of distribution or payment of such income, whichever is earlier.

(iii) The securitization trust will not be allowed any deduction under any other provision of the Act, in respect of income which has been subject to distribution tax under section 115TA.

(b) The securitisation trust will be liable to pay simple interest on the amount of additional income-tax not paid within the specified time i.e., within 14 days from the date of distribution or payment of such income, whichever is earlier. Such interest is leviable at the rate of 1% for every month or part of the month on the amount of such tax not paid or short paid, as the case may be, for the period beginning on the date immediately after the last date on which such tax was payable and ending with the date on which the tax is actually paid [Section 115TB].

(c) The person responsible for payment of income distributed by the securitization trust and the securitization trust will be deemed to be an assessee-in-default in respect of amount of tax payable by him or it, in case the additional income-tax is not paid to the credit of Central Government. In such a case, all the provisions of the Act for the collection and recovery of income-tax would apply [Section 115TC].

(3) Consequent to the levy of distribution tax, the distributed income referred to in section 115TA received from a securitization trust will be exempt from tax in the hands of the recipientinvestor with effect from A.Y.2014-15 [Section 10(35A)].

Illustration
A securitization trust distributes income of ` 10 lakh on 6th September, 2015 to its investors comprising of –

	Category of investor	Income distributed (Rs)
(i)	Mutual funds exempt under section 10(23D)	3,00,000
(ii)	Individuals and HUFs	1,50,000
(iii)	Persons other than mentioned in (i) & (ii) above	5,50,000

Compute the additional income-tax payable by the trust under section 115TA. Assuming that the additional income-tax payable as per section 115TA is paid to the credit of the Central Government on 25th November, 2015, compute the interest, if any payable, under section 115TB.

Solution
Computation of additional income-tax payable under section 115TA

	Category of investor	Income distributed (Rs)	Rate of tax	Amount of tax (Rs)
(i)	Mutual funds exempt under section 10(23D)	3,00,000	Nil	Nil
(ii)	Individuals and HUFs	1,50,000	28.84%	43,260
(iii)	Persons other than mentioned in (i) & (ii) above	5,50,000	34.608%	1,90,344
				2,33,604

The additional income-tax is payable on or before 20th September, 2015. However, the same was paid only on 25th November 2015.

Consequently, interest@1% per month or part of month is leviable under section 115TB, as follows –

Period	No. of months/ part of a month
21st September – 20th October, 2015 (whole of first month)	1
21st October – 20th November, 2015 (whole of second month)	1
21st November – 25th November, 2015 (part of third month)	1
No. of months for which interest is leviable u/s 115TB	3

Interest under section 115TB is payable @1% per month for 3 months on the amount of additional tax payable i.e., Rs 2,33,604. Therefore, interest payable under section 115TB is Rs 7,008.