News: Asset reconstruction companies (ARCs) have urged the government to extend pass-through tax status to alternative investment funds (AIFs) investing in security receipts (SRs).
About Pass-Through Tax Status
- Pass-through status is a tax rule where the business or fund itself does not pay corporation tax on its income.
- Normally, the same income can be taxed twice – once as corporation tax at the firm level and again when it is received by shareholders or investors.
- Working mechanism: Under pass-through status, the income generated by the fund (Pass-Through Entities) is taxed only in the hands of the investor, and the fund (Pass-Through Entities) does not pay tax on that same income.
- Purpose: This system is used so that income is not taxed twice – it avoids tax at both the fund level and again at the investor level for the same amount.
- Examples of Pass-Through Entities: Examples include sole proprietorships, S corporations, master limited partnerships, limited liability partnerships, and limited liability companies.
- Indian Context:
- In 2014, the Union Budget allowed Real Estate Investment Trusts (REITs), which are pooled vehicles for investing in real estate, to have pass-through status.
- Asset Reconstruction Companies (ARCs) are currently subjected to a steep 42.74% maximum marginal tax on income from Security Receipts (SRs) at the fund level.
- This high tax rate is viewed as a deterrent to investment in ARC trusts.
