BACKGROUND
Government of India introduced the concept of business trust by finance act, 2014. In India, business trust would operate as real estate investment trusts (popularly known as REITs) and infrastructure investment trusts (popularly known as INVITs). Real estate investment trusts (REITs) have been successfully used as instruments for pooling of investments in several countries earlier. Singapore acts as the supreme example of how successful can the framework of business trusts can be. Similar to the way mutual funds operate, they act as an investment channel that pools funds from residents and non-residents and mobilize direct investments in various infra and realtor projects.
The business trust would raise capital by way of issue of units (listed or unlisted) from prospective investors (known as unit holders) and can also raise debts directly both from resident as well as non-resident investor. The income bearing assets would on the following, be held by the trust by acquiring controlling or other specific interest in a special purpose vehicle (an Indian company) which invests directly on various mega projects.
In this regard, Section 115UA operates as taxing provision on income of unit holder and business trusts.
ANOMALY OR A MISS?
Section 115UA of the income tax act, 1961, INTER-ALIA, provides that notwithstanding anything contained in any other provisions of this act, any income distributed by a business trust to its unit holders shall be deemed to be of the same nature and in the same proportion in the hands of the unit holder as it had been received by, or accrued to, the business trust. Further, subject to the provisions of Section 111A and Section 112, the total income of a business trust shall be charged to tax at the maximum marginal rate (MMR). Maximum marginal rate or MMR, in relation to a trust, shall refer to maximum marginal rate applicable as per finance act 2022, which is 42.744%.
Thus, it is interesting to note that while Section 115UA taxes all income at MMR, it however provides exceptional relief for income in the nature of long-term capital gain u/s 112 and short-term capital gain in cases of income from transfer of equity shares or unit of equity oriented fund or unit of business trust (where STT is payable on such transfer) u/s 111A, as an exception and allows them to be taxed at their usual rates. The usual rates are 20% for long-term capital gain u/s 112 and 15% for short-term capital gain in the nature of income referred to in Section 111A above. Thus, it makes clear that the purpose of this Section is to tax any income pertaining from the special purpose vehicle to the business trust (other than the usual interest and dividend it receives) at MMR except long term capital gain and short-term capital gain u/s 112 and 111A respectively.
However the anomaly arises when Section 115UA makes no distinction for long-term capital gain u/s 112A which taxes long-term capital gain from transfer of equity shares, equity oriented units, or units of business trust at special rate of 10% (where STT conditions are met). This is in direct contrast with the fact that it provides exceptional relief to short-term capital gain of the same nature by allowing it to be taxed u/s 111A @15%. This is indicative of the fact that there exists a basic inconsistency in framing of Section 115UA, such that the long-term capital gain from transfer of one asset is taxed at the highest rate i.e. MMR while the short term capital gain from the same asset is taxable at its usual concessional rates.
The reason behind this can be found while we deep dive into the history of these Sections. After careful perusal of the issue, the author discovered that when Section 115UA was implemented, Section 112A did not exist. Section 112A was introduced by Sri Arun Jaitley, the then Union Finance Minister through finance act 2018 while Section 115UA was introduced before the said Section 112A. The said section 112A aims to bring into ambit the transfer of long term capital asset being equity shares, equity oriented units of a mutual fund and units of business trust and taxing the income at a concessional rate of 10% if the income was in excess of Rs.100000. Thus Sri Jaitley wanted to place tax incidence on such income while containing any viscosity in the retail investment sentiment. The intention of lawmakers is clear while reading the exceptional relief in Section 115UA, however it is probable that they might have missed the fact that Section 112A was left out to be added in that exceptional relief given in Section 115UA.
WAY FORWARD
Till date there exists no clarity as to whether income generated in the nature mentioned in Section 112A (transfer of equity shares, units of business trust and equity oriented units) is to be taxed at MMR or at special rates u/s 112A, i.e. 10% (if STT conditions were met). This would be dealt on an individual level and facts of each case. Till the date of writing this article, the writer has mailed this anomaly to the Finance Ministry for looking into the matter, bringing amendments if required fit and requesting quick disposal of the uncertainty. The writer is yet to receive any reply on the same.
The author is a qualified LL.B., who is currently pursuing Chartered Accountancy and is awaiting results for CA-Final exams. The writer is a regular contributor to ICAI Newsletters and other magazines and primarily focuses on legal research and tax compliance.
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