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Tax issue hits securitisation market hard

* So far,there has been virtually no securitisation transaction this fiscal

Written by George Mathew | Mumbai |
September 3, 2012 12:53:40 am

Taxation can make or break a market. If retrospective amendment of provisions on transfer pricing and General Anti Avoidance Rules played havoc in the capital market this year,the taxation issue on Pass Through Certificates (PTC) grounded the securitisation market in India.

Securitisation transactions in FY 2012 amounted to Rs 36,600 crore. However,with taxation issue vexing the players,there has been virtually no transaction during this fiscal so far.

“The securitisation market doesn’t exist now. The RBI had recently formulated guidelines for finance companies to operate in this market but this is of no use. The market is not functioning… and the business is zero,” said a banking source.

Securitisation is the system of pooling various types of contractual debt such as residential mortgages,commercial mortgages,auto loans or credit card debt obligations and selling them the repackaged consolidated debt as bonds,pass-through securities or collateralised mortgage obligation to various investors.

Vimal Bhandari,CEO & MD,Indostar Capital Finance,said,“Due to lack of clarity on tax incidence on pass-through vehicle,the securitisation business has come to a virtual standstill. It would help if the authorities issue clarification such that securitisation activities can restart,given its critical role in making finance available to banks and finance companies for lending to small and medium enterprises,including commercial vehicle owners.”

During FY 2012,the securitisation market in India grew by 15 per cent over the previous year,in value terms. The number of transactions was 32 per cent higher in FY 2012 than in the previous fiscal. The number and volume of retail loan securitisation was the highest in FY 2012 compared to previous fiscals,while the loan sell-off issuance was the lowest ever,rating firm ICRA said.

During FY 2012,income-tax authorities sent notices to trustees of several securitisation transactions,which the trustees in turn passed on to the investors — mutual fund houses — asking them to pay tax on income from PTCs.

MFs filed petitions in the Bombay HC,seeking relief from the tax claim and attachment of their accounts,given that MFs are exempt from income tax. The HC passed a stay order on the I-T notice till the commissioner I-T disposes off the appeal filed by the mutual funds against its notice.

MFs have refrained from investing in securitised instruments till the matter is sorted out. Securitisation transactions in India basically operate on the premise that the beneficiaries of the SPV will offer the income earned from the investment to tax,and thus the income should not be taxed at the level of the trust,ICRA says. I-T department’s stance challenges this premise and thus a resolution to this issue could be an important factor for determining the future of securitisation.

Losing faith

During FY 2012,I-T dept sent notices to trustees of several securitisation transactions,which the trustees in turn passed on to investors (MFs) asking them to pay tax on income from Pass Through Certificates

Mutual Funds filed petitions in the Bombay HC,seeking a relief from the tax claim given that MFs are exempt from income tax

High court passed a stay order on the notice till the commissioner I-T disposes off the appeal filed by the mutual funds against its notice

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