Pass-Through Tax Status Request by ARCs
Asset Reconstruction Companies (ARCs) in Mumbai have appealed to the government for a change in tax policy regarding the treatment of income from Security Receipts (SRs).
Current Taxation Issue
- ARCs are currently subjected to a steep 42.74% maximum marginal tax on income from SRs at the fund level.
- This high tax rate is viewed as a deterrent to investment in ARC trusts.
Proposed Tax Treatment
- ARCs suggest that profits from SR investments should be taxed directly in the hands of end investors, according to their respective tax rates.
- The request is to treat income from SRs as pass-through, akin to investment income.
Clarifications and Extensions Requested
- ARCs seek clearer guidelines for foreign investors regarding the applicable tax rate on investments in SRs issued by ARC trusts.
- A recommendation from a Reserve Bank of India committee is to align SR income with other securities like government securities and corporate bonds.
- ARCs urge the extension of existing 5% concessional tax rate to interest income from SR investments for FPIs.
Stakeholder Perspectives
- Hari Hara Mishra, CEO of the Association of ARCs in India, emphasizes that a tax-friendly regime is crucial for liquidity in distressed debt markets.
- A favorable tax regime is seen as essential for developing a vibrant market, facilitating exit for existing investors, and attracting risk capital.
