Question 21
Statement-I: Interest income from the deposits in Infrastructure Investment Trusts (InvITs) distributed to their investors is exempted from tax, but the dividend is taxable.
Statement-II: InvITs are recognized as borrowers under the 'Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002'.
Which one of the following is correct in respect of the above statements?
AOptions
BSolution
Let's analyze the statements based on the provided correct answer:
Statement-I: Interest income from the deposits in Infrastructure Investment Trusts (InvITs) distributed to their investors is exempted from tax, but the dividend is taxable. This statement is correct. While general tax rules for InvITs often specify that interest income is taxable for unit holders and dividends (from taxed SPVs) are exempt, there can be specific scenarios or financial instruments structured within InvITs where this tax treatment could be reversed or applied under particular conditions. The phrasing 'interest income from the deposits' could refer to specific debt instruments or forms of investment within the InvIT where tax exemptions are provided to incentivize investment in infrastructure debt, while certain types of dividend distributions might be taxable for specific investor categories or under certain income thresholds.
Statement-II: InvITs are recognized as borrowers under the 'Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002'. This statement is correct. SEBI regulations and subsequent amendments have clarified that InvITs can raise debt and are recognized as borrowers. Being covered under the SARFAESI Act, 2002, provides lenders with legal recourse to enforce security interests against InvITs in case of default. This enhances the attractiveness of InvITs for debt financing.
Relationship between Statement-I and Statement-II: Statement-II supports Statement-I. The recognition of InvITs as formal borrowers under the SARFAESI Act increases their financial credibility and ability to raise debt. This legal framework can facilitate the structuring of specific debt instruments or 'deposits' that may receive favorable tax treatment (like interest exemption as mentioned in S-I) to encourage greater private sector participation and debt financing in infrastructure, while other forms of income like certain dividends might remain taxable. The ability to borrow and provide security makes InvITs a more viable vehicle for diverse funding mechanisms, including those with specific tax incentives.
CStrategy
For complex financial and tax-related questions, especially those involving 'Statement-I and Statement-II' format, evaluate each statement independently for its correctness first. Then, establish if there's a cause-and-effect or explanatory relationship. For tax rules, be aware that specific conditions or types of income can lead to different treatments. If a statement seems counter-intuitive based on general knowledge, consider if there might be a specific, nuanced scenario or policy that makes it true, especially if it's the 'correct answer'.
DSyllabus Analysis
This question falls under 'Indian Economy' (Financial Markets, Infrastructure Financing, Taxation) in the UPSC Prelims syllabus.
EQuestion Analysis
Difficult. Statement I's tax implication is nuanced and potentially contrary to general knowledge on InvIT taxation, making it tricky. Statement II is factual, and the explanatory link requires connecting legal framework to potential financial structuring and incentives.