The Securities and Exchange Board of India (Sebi) has sought clarity from the government on taxation of securitisation contracts, asking the Centre to take a final stand on the issue.
“One of the reasons we see less activity on the securitisation front is because the taxation policy isn’t clear,” Sebi Chairman U K Sinha said on the sidelines of the India Securitisation Summit. “Recently, there have been some developments, especially with regard to taxation. Asset management companies received notices that they would have to pay taxes. This is the matter which the government would have to clarify — what is its real and final position?” he asked.
Sinha said securitisation was important for the growth of the country’s financial services industry, adding Sebi would be willing to look at any regulatory change required to develop the market.
Earlier this year, the Income Tax Department had issued notices to trustees of several securitisation transactions, asking them to pay tax on income through pass-through certificates.
The trustees, in turn, had asked asset management companies (AMCs), which had invested in these instruments, to pay the tax. Following this, AMCs had filed petitions in the Bombay High Court, seeking relief from the tax. Though the court passed a stay order on the Income Tax Department’s notice, the episode made AMCs wary of investing in securitised instruments, owing to lack of clarity on the matter.
Yashpal Gupta, deputy chief executive, IDBI Trusteeship Services, said the Income Tax Department’s position made the product unviable. “Asset management companies are expected to pay up to 35 per cent tax on receipts from the originator. Different tax officers are taking different positions. The matter has to be clarified at the highest level. Otherwise, the product would not take off,” he said.
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Arjun Parthasarathy, founder, investorsareidiots.com, said the uncertainty had to be cleared for the product to become popular.
According to a report by ratings agency Icra, though the securitisation market grew 15 per cent in 2011-12, the volume of issuances continues to remain subdued and concentrated among a few originators. “In 2011-12, about 75 per cent of the market was essentially bilateral loan pool trading, driven by the economics of priority sector lending targets. It follows the investor segment is largely banks, primarily private sector and foreign banks. Mutual funds have mostly been absent from the securitisation market for a variety of reasons, the latest being the unresolved issue of income tax authorities’ claim on taxing the income from securitised instruments,” the report said.