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TMI BlogComprehensive Review of Taxation, Reporting, and Compliance for Securitisation Trusts : Clause 221 of the Income Tax Bill, 2025 Vs.Section 115TCA of the Income Tax Act, 1961X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 115TCA of the Income Tax Act, 1961. The mechanics of reporting and compliance are further detailed in Rule 12CC of the Income-tax Rules, 1962, while Notification No. 46/2016 addresses the withholding tax (TDS) implications on such income. Given the centrality of securitisation trusts to India's financial and capital markets-especially in the context of asset-backed securities, non-performing asset (NPA) resolution, and structured finance-these provisions have significant ramifications for investors, financial institutions, and the regulatory apparatus. This commentary provides a detailed analysis of Clause 221, contrasts it with the existing Section 115TCA framework, explores the operational rules and notifications, and assesses t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e; instead, the investor is taxed as the ultimate recipient. This approach ensures tax transparency and avoids the economic distortion of double taxation, which would arise if both the trust and the investor were taxed on the same income stream. It also aligns with the economic substance of securitisation, where the trust acts as a conduit rather than as an income-generating entity in its own right. (2) Character and Proportion of Income Clause 221(2) stipulates that the income paid or credited by the trust is deemed to retain its nature and proportion in the hands of the investor, as if the trust itself had received or accrued the income during the tax year. This provision is crucial for determining the applicable tax rates and exemptio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... framework, ensuring transparency and facilitating effective tax administration. The details and formats are to be prescribed by rules, which in the current regime are set out in Rule 12CC and Forms 64E and 64F. (5) Prevention of Double Taxation Clause 221(5) provides that any income already included in the total income of the investor in a tax year (on account of accrual or arising) shall not be included again in the year in which it is actually paid by the trust. This prevents double taxation of the same income-first on an accrual basis and then on actual payment-thus upholding the integrity of the pass-through regime. (6) Definitions Clause 221(6) defines key terms: * Investor: Holder of any securitised debt instrument, securities, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SARFAESI frameworks. * Reporting: Both require statements to be furnished to investors and tax authorities, with details to be prescribed by rules. * Deemed Credit: Both provide for deemed credit of income not actually paid, on the last day of the tax year, in the relevant proportion. * Nature of Income: Both ensure that the income retains its character in the hands of the investor. * Double Taxation Prevention: Both prevent inclusion of the same income in multiple years. Key Differences (if any): On a close reading, Clause 221 does not introduce any material substantive changes vis-`a-vis Section 115TCA. The language is updated to align with the drafting style of the new Bill (e.g., "tax year" instead of "previous year"), and ref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ountants underscores the importance of transparency and auditability. 3. TDS Exemption for Securitisation Trusts - Notification No. 46/2016 Notification No. 46/2016, issued u/s 197A(1F) of the Income-tax Act, 1961, provides that no tax deduction at source (TDS) under Chapter XVII shall be made on payments of the nature specified in Section 10(23DA) received by any securitisation trust as defined in Section 115TCA. This notification is significant as it eliminates the cash-flow and compliance burden of TDS on securitisation trusts, which act as pass-through entities. The rationale is that since the income is ultimately taxed in the hands of the investors, subjecting the trust to TDS would create unnecessary complexity and potential f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... audit and monitoring. * Prevention of Tax Evasion: Deemed credit and detailed reporting prevent deferral or concealment of income. * Administrative Efficiency: Standardised forms and timelines streamline compliance oversight. Potential Issues and Ambiguities * Timing Mismatches: Accrual-based taxation may create cash-flow mismatches for investors, who may be taxed before actual receipt of income. * Characterisation Disputes: Preserving the "nature" of income requires accurate classification by the trust; errors or disputes can lead to litigation. * Complexity for Non-Resident Investors: Issues relating to treaty benefits, withholding tax, and foreign tax credits may arise, especially for cross-border investors. * Evolving Fina ..... X X X X Extracts X X X X X X X X Extracts X X X X
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