USINESS TRUSTS – Meaning & Provisions

BUSINESS TRUSTS – Meaning & Provisions

Meaning of Business Trust — “Business trust” means a trust registered as an Infrastructure Investment Trust or a Real Estate In vestment Trust, the units of which are required to be listed on a recognised stock exchange, in accordance with the regulations made under the Securities Exchange Board of India Act, 1992 and notified by the Central Government in this behalf; (kindly see the chapter—”lncome-tax on Companies’ for details). Special Provisions Relating to Business Trusts’— The said Chapter proposes—Section-lI UA [Tax on income of unit holder and business trust] namely:— to provide that the distributed income in the hands of the unit holders will be of the same nature and in the same proportion as the income in the hands of the trust;  to provide that the total income of the trust other than capital gain would be taxed in the hands of the trust at the maximum margin rate and capital gain would be taxed in accordance with sections lilA and 112;  to provide that any distributed income or part thereof received by a unit holder from the business trust is of the same nature as the income referred to in clause (23FC) of section 10, then, such distributed income or part thereof shail be deemed to be the income of such unit holder and shall be charged to tax as income of the previous year;  to provide that the person responsible for making payment of income or any part thereof distributed on behalf of a business trust to a unit holder, shall provide a statement to the unit holder and the prescribed authority in such time and in the form and manner as may be prescribed. This amendment wiil take effect from 1st April, 2015 and will, accordingly, apply inrelation to the assessment year 2015-16 and subsequent years.

Provisions relating to Tax on Distributed Income by Securitisation Trust

1.         [Section 115-TA] : Tax on Distributed Income to Investors by an Securitisation Trust Any distributed income to an investor by a securitisation trust shall be liable to the levy of additional income-tax at the rate of twenty-five per cent. on the distributed income if such income is paid to a person being an individual or Hindu undivided family. The additional income-tax shall be levied at the rate of thirty per cent., if such distributed income is paid to a person other than individual and Hindu undivided family. No additional income-taxshall be levied, if the distributed income is paid to any person who is exempt under theAct. It also provides that the amount of tax shall be remitted within fourteen days of the date of payment or distribution of income. It is provided that no deduction under any provisions of the Act shall be allowed to securitisation trust in respect of the said income.[The section provides that the securitisation trust shall, before the 15th day of September in each year, furnish a statement in the prescribed form providing the details regarding the amount of income distributed to the investors and the tax paid in the previous year.] 2.         Statement under of Section 115TA(3) Vide Not. No. Notification No. S.Q.266(E), Dated 4.9.2013—(1) The statement of income distributed by the securitisation trust shall be furnished as provided in sub-rule(2) to— The Assessing Officer so designated by the Chief Commissioner or Commissioner of Income-tax, within whose area of jurisdiction, the principal office of the securitisation trust is situated;  in any other case, to the Assessing Officer within whose area of Jurisdication, the principal office of the securitisation trust is situated. (2) The statement of distributed income which is to be furnished under sub-section (3) of section 11 5TA by the securitisation trust shall be in Form No. 63AA, duly verified by an accountant in the manner indicated therein.; 3.         Interest payable for non-payment of tax [Section 115TB] The levy of interest, in case of failure to pay tax within the time provided, at the rate of one per cent. for every month and part thereof on such failure. 4.         Securitisation trust to be assessee in default [Section 115TC] In case of failure on payment of tax, the person responsible for making payment ofincome distributed by the securitisation trust and the securitisation trust shall be deemed to be an assessee in default in respect of the amount of tax payable and all provisions of the Act relating to recovery and collection of taxes shall apply.

Definition of ‘Securitization Trusts’ as per the RBI Guidelines

RBI Guidelihes define 'Securitisation Trust' as— •           a process by which •           a single performing asset or a pool of performing assets are sold to a bankruptcy remote SPV and transferred from.the balance-sheet of the originator to the SPV •           in return for an immediate cash payment. “Originator” in these guidelines refer to a bank that transfers from its balance-sheet asingle asset or a pool of assets to an SPV as a part of a securitisation transaction and would include other entities of the consolidated group to which the bank belongs. (1)       Securitisation, as per the SARFAESI Act, includes the followingexercises namely (a) acquisition of financial interests of originator (b) raising of funds by issuing security receipts to QIB ; and (c) paying the consideration for the acquisition of the financial assets to the originator, i.e., the bank! Fis, which transfers such financial assets. (2)       The main agencies involved in the process of securitisation as per the SARFAESI Act are: “Originator, obligator, investors, QIB, credit enhancers, legal advisors, receiving and paying agents, servicer of transactions and structure of deals.” (3)       Other definitions in the context of section (2) of the SARFAESI Act and as per the Income-tax Act (section. 115TC) are as under: (1)        Investor means a person, who is holder of any securitised debt, instrument or securities issued by the securitisation trust (clause (a) of the Explanation below section 115TC. (2)        Originator Means the owner of a financial asset, which is acquired by a securitisation company or reconstruction company for the purpose of securitisation or assets reconstruction (section z(r)). (3)        Obliger Means a person liable to the originator, whether under a contract or otherwise, to pay a financial asset to discharge any obligation in respect of a financial asset, whether existing, future, conditional or contingent and includes the borrower (section z(q)). (4)        Property Means— (i) immovable property (ii) movable property (iii) any debt or any right to receive payment of money, whether secured or unsecured (iv) receivables, whether existing or future (v) intangible assets, being know-how, patent, copyright, trade mark, licence, franchise or any other business or commercial right of similar nature (section z(t)). (5)        Qualified institutional buyer (QIB) Means a financial institution, insurance company, bank, state financial corporation, state industrial development corporation, trustee or securitisation company or reconstruction company, which has been granted a certificate ofregistration under sub-section (4) of section 3 or any assets management company making investment on behalf of mutual fund or a foreign institutional investor registered under the Securities and Exchange Board of India Act, 1992 (15 of 1992), or regulations made thereunder, or any other body corporate as may be specified by the Board (section z(u)). (6)        Non-performing asset (NPA) Means an asset or account of a borrower, which has been classified by a bank or financial institution as sub-standard, doubtful or loss asset— in case such bank or financial institution is administered or regulated by any authority or body established, constituted or appointed by any law for the time being in force, in accordance with the directions or guide-lines relating to assets classifications issued by such authority or body in any other case, in accordance with the directions or guidelines relating to assets classifications issued by the Reserve Bank of India (section z(o)). (7)        Reconstruction company Means a company formed and registered under the Companies Act, 1956 (1 of 1956), for the purpose of asset reconstruction, (Definitions at S. Nos. 2 to 7 are as per SARFAESI Act) (8)        Securities mean debt securities issued by the SPV as referred to in theguidelines on securitisation of standard assets issued by the RBI (vide clause (b) of the Explanation to section 115TC). (9)        Securitisation trust Clause (d) of Explanation to section 11 5TC defines securitisation trust. It provides that securitisation trust means a trust, being a— (i)         special purpose distinct entity as defined in clause (u) of sub-regulation (1) of regulation 2 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. (ii)        SPV as defined in and regulated by the guidelines on securitisation of standard assets issued by the RBI, which fulfils such conditions, as may be prescribed. (10)      Securitised debt instrument Securitised debt instrument is defined in clause (c) of the Explanation to section 115TC. The said clause refers to clause (s) of sub-regulation (1) of regulation 2 of the Securities and Exchange Board of India (Public Offer and Listing of Securitized Debt Instruments) Regulations, 2008, which, in turn refers to section 2(h)(ie) of the Securities Contracts (Regulation) Act, 1956. Securitized debt instrument as so defined has the following ingredients : • It is any certificate or instrument (by whatever name called). • It is issued to an investor. • Its issuer is a special purpose distinct entity. • It possesses any debt or receivable, including mortgage debt assigned to such entity. • It acknowledges beneficial interest of such investor in such debt or receivable, including mortgage debt, as the case may be. If all above ingredients are present, then the certificate or instrument shall be treated as ‘securitized debt instrumenf. (4)       Securitisation in general is a three-stage process and involves three parties to the transactions, namely,: (i) originator (ii) the securitisation company (iii) the qualified institutional buyer (5)       The process could be summarized thus: (1)        the loan is sanctioned by the secured creditor to the borrower. (2)        the secured creditor assigns/sells the financial dues of future from the borrower to the securitisation company. (3)        The borrower becomes the obligor, the secured creditor is referred to as the originator. (4)        the financial assets are sold for a consideration to the securitisation company, which raises the funds from the QIB. Essentially, the QIB is the investor, which subscribes to the securities issued by the securitisation company for the purpose of paying off the originator, or for the purpose of the subscription of the securities. (5)        the QIB receives the payment of the dues made by the obligor to the originator 5 and the transaction becomes self-liquidating type. Due to many considerations, the financial assets may be transferred to the SPV, which may be set up by a securitisation company (as per the Act), which would acquire the assets and issue the security receipt. The idea is to keep the originator/securitisation company separate from the entity, which is to deal and hold the securities issued for the purpose of the transaction. (5.1)     A securitisation company acts as a conduit/SPy for transferring the financial assets of the originator to the QIB. This can be referred to as a conduit between the two. There are other reasons for bringing this entity into existence. (5.2)     The structure of SPV can be a trust, like debenture trustees, which are appointed for a very specific purpose. Trust is not a legal entity in law. The trustee typically issues the security receipts/PTCs, which is a certificate of beneficial interest. Beneficial property and legal property are different in law and hence, the security receipts/ PTCs would not amount to the transfer of property by the SPE/ SPV. It just proves that the holder has some beneficial interest. Trustee can hold property. (5.3) In short, SPV acts as a conduit between the QIB and the originator. (6)       Examination of income-tax provisions With the above background, the Income-tax provisions relating to Securitisation Trusts (S. Trusts for short) referred to earlier in paras 1 & 2 can be examined. (6.1) Need for income-tax provisions The initial issue that arises for consideration in the context of securitisation provisions introduced by the Finance Act, 2013 is regarding the need for such provisions. Some mention about their necessity can be gathered from the Finance Minister’s speech extracted earlier (in para 1): The major concern justifying such provisions in the Income-tax Act could be said to be the emergence of mutual funds in a major way in the last 2-3 decades and the exemption of their income under section 10(23D) of the Act. Hence, if such mutual funds themselves carry on securitisation, there would be no need for SPV with a distinct entity as income arising from such activity would be exempt from tax. But, this is not permissible under the SARFAESI Act because securitisation activity has to be through an SPy. So, if a separate trust is set up by mutual funds, its income would be taxable under section 161 of the Act at the maximum marginal rate, i.e., at 30% + education cess at the prescribed rates. Section 161 of the Act provides that in case of a trust if its income consists, of or includes, profits and gains of business then income of such trust shall be taxed at the maximum marginal rate in the hands of trust. 7)        Salient aspects of the new provisions (i)         The income of Trusts, whose activities are to be regulated by the SEBI or the RBI, will be exempt from tax regarding income from securitisation activities. (ii)        If such trusts distribute any income to its investors, it would be liable to dividend distribution tax (DDT) on the lines levied in the case of mutual funds. The additional income-tax shall be levied at the rate of 28.325% (inclusive of surcharge, education cess and secondary and higher education cess) in case of distribution being made to investors who are individual and HUE and at the rate of 33.99% in other cases. No additional income-tax shall be payable if the income distributed by the securitisation trust is received by a person, who is exempt from tax under the Act. Section 10(23D) newly inserted in the Income-tax Act, with effect from the assessment year 2014- 15, however, provides that any income of a securitisation trust from the activity of securitisation shall be exempt from tax. (iii)       The distributed income would not be taxable in the hands of the investors (section 10(35)). The securitisation trust will be liable to pay interest at the rate of one per cent, for every month or part of the month or the amount of additional income-tax not paid within the specified time.

Definition of ‘Securitization Trusts’ as per the SEBI Regulations

Clause (r) or sub-regulation (1) of regulation 2 of the SEBI (Public Offer and Listing of Securitised Debt Instruments) Regulations, 2008 defines “securitisation” to mean : • acquisition of debt or receivables • by any special purpose distinct entity from any originator or originators • for the purpose of issuance of securitised debt instruments to investors based on such debt or receivables and such issuance, “Originator” under these Regulations, means the assignor of debt or receivables to a special purpose distinct entity for the purpose of securitisation.

Section-2(z) - Definition of ‘Securitization Trusts’ as per SARFAESI Act.

Securitisation is defined in Section 2(z) of the SARFAESI Act as under: “Securitisation” means acquisition of financial assets by any securitisation company or reconstruction company from any originator, whether by raising of funds by such securitisation company or reconstruction company from qualified institutional buyers by issue of security receipts representing undivided interest in such financial assets or otherwise.” As per the sub-section, the securitisation is the process of acquisition of financial assets (and not secured assets) by the securitisation company from the ‘originator’ by raising funds from the qualified institutional buyer (QIB) by issuing ‘security receipts’, which represents the undivided interest in such financial assets or otherwise.

Provisions to Securitisation Trusts [As introduced by the Finance Act, 2013]

It contains the following provisions:— (a)        registration and regulation of Securitisation companies or reconstruction companies by the RBI; (b)       Facilitating Securitisation of financial assets of banks and financial institutions with or without the benefit of underlying securities; (c)        Facilitating easy transferability of financial assets by the company or reconstruction company to acquire financial assets of banks and financial institutions by issue of debentures or bonds or any other security in the nature of a debenture; (d)       empowering Securitisation companies or reconstruction to raise funds by issue of security receipts to qualified institutional buyers; (e)        facilitating reconstruction of financial assets acquired by exercising powers of enforcement of securities or change of management or other powers! which are proposed to be conferred on the banks and financial institutions; (f)        declaration of any Securitisation company or reconstruction company registered with the RBI as a public financial institution for the purpose of section 4A of the Companies Act, 1956 (g)       defining security interest’ as any type of security, including mortgage and changeon immovable properties given for due repayment of any financial assistance given by any bank or financial institution; (h)       empowering banks and financial institutions to take possession of securities given for financial assistance and sell or lease the same or take over management in the event of default, i.e., classification of the borrower’s account as non-performing asset in accordance with the directions given or guidelines issued by the RBI from time to time; (i)         the rights of a secured creditor to be exercised by one or more of its officers authorised in this behalf in accordance with the rules made by the Central Government; (j)         an appeal against the action of any bank or financial institution to the concerned Debts Recovery Tribunal and a second appeal to the Appellate Debts Recovery Tribunal; (k)        setting up or causing to be set up a Central Registry by the Central Government for the purpose of registration of transactions relating to Securitisation, asset reconstruction and creation of security interest; (I)         application of the proposed legislation initially to banks and financial institutions and empowerment of the Central Government to extend the application of the proposed legislation to non-banking financial companies and other entities (m)      non-application of the proposed legislation to security interests in agricultural lands, loans not exceeding rupees one lakh and cases, where 80% of the loans are repaid by the borrower.

[Section-67A] : Method Of Computing A Members Share In Income Of Association Of Persons (AOP) Or Body Of Individuals (BOI)

Computation of share of its member where the share of members of AOPs/BOI are determinate or known are as under: (a )       Deduct any interest, salary, bonus, commission or remuneration by whatever name called; (b)       Deduct the amount apportioned to a member under clause (a) is a profit, any interest, salary, bonus, commission or remuneration aforesaid paid; (C)       Deduct the amount apportioned to a member under clause (a) is a loss, any interest, salary, bonus, commission or remuneration aforesaid paid to the member by the association or body in respect of the previous year shall be adjusted against that amount, and the result shall be treated as the member’s share in the income of the association or body. (d)       The share of a member in the income or loss of the association or body, as computed above for the purposes of assessment, be apportioned under the various heads of income. (e)        Any interest paid by a member on capital borrowed by him for the purposes of Investment in the association or body shall, in computing his share chargeable under the head “Profits and gains of business or profession”.

Tax Rates applied on Charitable and Religious Trusts

SECTION INCOME RATE OFINCOME TAX A.Y. 201 4-2015 & 2015-2016 161(1A) On Income from business when assessee is a trust as per terms of the section. 30% 164 On Income of private discretionary trust where shares of beneficiary are not known. 30% 164A Income of Oral trusts. 30% 167A Income of a firm 30% 167B(1) On Income of A.O.P. or B.O.l. where shares of members are not known. (Provided if income of any member is chargeable at a higher rate than the higher rate shall be applicable). 30% 167B(2)(i) On Income of A.O.P. or B.O.I. not covered u/s 167B(1) while other income of any member exceeds the thresh hold limit. (See Note) 30% 167B(2)(ii) On Income of A.O.P. or B.O.l. where income of a member is chargeable at a rate higher than the maximum chargeable rate then on that portion of income of the A.O.P. or B.O.I.that relate to such person the tax shall be calculated on such higher rate and on balance of total income. - (See Note) 30%

Note:—lf total income of any member of the association or body is chargeable to tax at a rate higher than 30.9%.

[Section-167B] : Association Of Persons (AOP) And Body Of Individuals (BOI)

(A) Where the Individual Share Of The Members of an AQPs / BOIs are unknown— tax shall be charged on the total income of the body at the maximum marginal rate of tax: Where the total income of any member of such association or body is chargeable to tax at a rate which is higher than the maximum marginal rate, tax shall be charged on the total income of the association or body at such higher rate. (B) Where the Shares Of The Members Of An Association Of Persons Or Body Of Individuals Are Known: (i)         the total income of any member thereof for the previous year exceeds the maximum amount which is not chargeable to tax, tax shall be charged on the total income of the association or body at the maximum marginal rate;  (ii)       any member or members thereof is or are chargeable to tax at a rate or rates which is or are higher than the maximum marginal rate, tax shall be charged on that portion or portions of the total income of the association or body which is or are relatable to the share of such member or members at such higher rate or rates, as the case may be, and the balance of the total income of the association or body shall be taxed at the maximum marginal rate.