Amendments made by Finance Act of 2013: Acknowledging various representations of the industry in this regard, in order to facilitate the securitization process and address this controversy, the Finance Act 2013 provided a special taxation regime in respect of taxation of income of securitization entities, set up as a trust, from the activity of securitization. The salient features of the regime were as follows:

Ø  In case of securitization vehicles set up as a trust and the activities of which were regulated by either SEBI or the RBI, the income from the activity of securitization was exempt from taxation.

Ø  The securitization trust (ST) was liable to pay income tax on income distributed to its investors on the line of distribution tax levied in the case of mutual funds. The income tax was levied at 25% in case of distribution being made to individual investors and Hindu Undivided Families, and at 30% in other cases. No income tax was payable if the income distributed by the ST was received by a person exempt from tax under the domestic tax law (such as mutual funds).

Ø  Consequent to the levy of distribution tax, the distributed income received by the investor was exempt from tax.

Concerns not addressed by Finance Act 2013:

Ø  The distribution received by the PTC holders attracted taxation on a gross basis at a significantly high rate of 30% (for taxpayers other than individuals and a Hindu Undivided Families).

Ø  As the income received by PTC holders was exempt from tax, according to the provisions of the domestic tax laws, a disallowance of expenses incurred in relation to this income would have to be made by the PTC holders in their tax returns.

Ø  Trusts set up by reconstruction companies or securitization companies were not covered (although such trusts also engaged in securitization activities). These companies were established for the purposes of the securitization and reconstruction of financial assets and the enforcement of the SARFAESI Act, with the RBI regulating their activities.

Amendments made by Finance Act 2016:

To address the concerns arising from the tax regime of Finance Act 2013, the Finance Act 2016 has replaced the special regime for Securitisation Trusts with the following: