ARCs want to be on a par with MFs on tax front

Asset reconstruction companies (ARCs) have moved the finance ministry seeking a tax status that is on a par with mutual funds. As of now there is no clarity on what sort of taxation will apply to ARCs.

For instance the Asset Reconstruction Company of India Ltd (Arcil), India's first ARC, now pays corporate tax at the rate of 36 per cent on par with corporates and may be subject to double taxation if the trusts that are under its structure to resolve bad loans gets taxed.

On the other hand mutual funds enjoy a tax exemption under section (10)(23D) of the Income Tax Act since the income they generate through the funds are for the client. The parent asset management company pays the normal corporate tax at the rate of 36 per cent.

Now ARCs also want exemption for the trusts like the MFs, said sources. Arcil forms a trust to resolve a particular borrower's bad loans. So when the trust resolves the case and in case it makes an income it may be subject to income-tax on it.

So as of now Arcil has worked around the problem by operating through revocable trusts or trusts that dissolve itself after the specified task is over so as to avoid the issue of double taxation.

The ARC's point of view is that the trust generates no income for itself through resolution of bad loans. Any income if at all gets passed on to the investors in the bad debt.

These investors hold security receipts issued by the ARC.

Another significant announcement expected in the upcoming Budget, as far as ARCs are concerned, is permitting a FDI limit of 74 per cent in ARCs.

The limit will include investments by single or group entities, FIIs and NRIs. Reserve Bank of India is understood to have recommended a 49 per cent FII investment limit in ARCs.