tag:blogger.com,1999:blog-19649274.post3421973174064733046..comments2024-03-27T17:16:12.789+05:30Comments on The Leap Blog: Unanticipated consequences of Finance Bill provisions on securitisationAjay Shahhttp://www.blogger.com/profile/03835842741008200034noreply@blogger.comBlogger5125tag:blogger.com,1999:blog-19649274.post-44982758726165276222016-01-11T16:18:33.140+05:302016-01-11T16:18:33.140+05:30Let us appreciate that distribution tax on securit...Let us appreciate that distribution tax on securitisation is a problem, and we are now trying to approach the problem to look for solutions.<br />There are two ways to address a problem - trying to find a way to correct the scenario, or trying to a fundamental question as to whether the distribution tax , in the first place, was justified at all?<br />Distribution tax exists in case of corporate dividends and mutual funds distributions, where the premise is that there may be a revenue leakage if we taxed the recipients, whereas, if we tax at the time of distribution, that possibility is minimised.<br />The type of investors who invest in shares and mutual fund units, and those who invest in securitisation, are fundamentally different. Investors in securitisation are mostly banks, financial institutions, etc. The question of any revenue leakage, if the recipient of the income was tax rather than taxing at source, does not exist at all. Therefore, there is no case, in the very first place, for a tax at the time of distribution.<br />Let us appreciate that distribution tax is essentially inequitable, as it fails to look at the net income of the recipient.<br />In the instant case, if a securitisation trust receives 10% income on an investment of Rs 100 made by the investor, and pays 30% tax on that, the investor gets a post-tax return of 7%. The investor mostly may be a leveraged institution having its cost of funding, which may mostly be higher than 7%. This makes the investment eminently unprofitable. All the more, the model completely divorces taxability of the income from the expenses incurred in generating the income.<br />Let us realise that we are one out of 100 odd countries in the world, which have securitisation, much more developed than ours. Hence, we do not have to invent a model that does not exist anywhere in the world. Securitisation taxation world-over tries to neutralise the tax on the SPV, so that the existence of tax at SPV level does not make the transaction tax-inefficient. Securitisation is not a tax shelter, but it cannot end up being a tax burden. Hence, the objective of the law is to ensure that the law puts conditions on tax transparency, which adequately safeguard the transaction from being a tax shelter.<br />In India, there is no evidence in the past of securitisation resulting into any tax leakage. Hence, the very concern that distribution tax tries to address does not exist.<br />On the hand, the impact of distribution tax in the past 3 years is quite evident. Most transactions have moved away from securitisation model to bilateral assignments, which is like being primitive.vinodkotharihttps://www.blogger.com/profile/08860461854623474555noreply@blogger.comtag:blogger.com,1999:blog-19649274.post-29148761877204858672013-03-18T17:15:32.986+05:302013-03-18T17:15:32.986+05:30I am not sure how both the cases are similar. In o...I am not sure how both the cases are similar. In one case the Bank/any corporate will have to pay tax on INCOME and in the other case the tax will be on return ( Income - Cost).Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-19649274.post-77386075925435452112013-03-18T13:51:56.650+05:302013-03-18T13:51:56.650+05:30In the above case:
1. Will the Bank be able to cla...In the above case:<br />1. Will the Bank be able to claim the deposit cost amongst overall cost?<br />2. Will the Bank be liable to pay income tax on the income of INR 91, which would effectively mean a case of double taxation. <br /><br />Also the article highlights the significance of the words "additional tax", but as per a blog by Vinod Kothari, this is simply a case of historical usage rather than a case of something 'additional'. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-19649274.post-50257668292270390282013-03-13T20:15:12.736+05:302013-03-13T20:15:12.736+05:30Agree with you. The hypothetical case illustrates ...Agree with you. The hypothetical case illustrates that if the investor were taxed on the Rs.130, i.e. on the "income distributed", this would amount to taxation of revenue not income of the investor. Our view is that calculating taxable income / deducting expenses etc. at the SPV level is regressive. The investor should be ultimately liable for his / her tax payments to ensure (a) uniformity of treatment for investors who may have different tax rates and (b) facilitating a secondary market for such securities. This is similar to what has already been done for non-convertible debentures, where interest income / capital gains is calculated for the investor’s tax computation and no deduction at source is requiredKshama Fernandesnoreply@blogger.comtag:blogger.com,1999:blog-19649274.post-51712310958638028582013-03-13T13:01:07.149+05:302013-03-13T13:01:07.149+05:30I have a different view so far tax impact is conce...I have a different view so far tax impact is concerned. In your hypothetical case, for an investment of Rs.1000 in SPV by a bank where return in 13%, income of the bank is Rs.130 and 30% tax is to be deducted on this. Your point is that bank incurs expenditure of Rs.75 for deposit of Rs.1000, hence net taxable income is Rs.55 (130-75) and tax be deducted on this amount. <br />Even otherwise, bank in its final tax assessment will show Rs.75 (on account of deposit cost) as deductible from its income. Therefore, it may claim double benefit - one if allowed to deduct expenses at SPV stage and second when it prepares final financial statement. Hence, it is better not to allow any expenses at SPV stage. I am not a tax expert hence might be missing the nuances. nitesh ranjanhttps://www.blogger.com/profile/09924927003918120485noreply@blogger.com