Clause 393 Tax to be deducted at source.

Income Tax Bill, 2025

Introduction

The taxation regime for distributed income from business trusts, particularly Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs), has evolved considerably over the past decade in India. The Income Tax Bill, 2025, through Clause 393 and its associated tables, proposes a consolidated and, in some respects, reformed approach to the deduction of tax at source (TDS) on such distributed income. Section 194LBA of the Income Tax Act, 1961, currently governs TDS on certain income distributed by business trusts to their unit holders, both resident and non-resident. This commentary provides an in-depth, clause-wise analysis of the relevant provisions in the Income Tax Bill, 2025 (specifically Clause 393(1)[Table: S.No. 4(ii)], Clause 393(2)[Table: S.No. 6 & 7], and Clause 393(4)[Table: S.No. 5, 13]), and compares them with the existing Section 194LBA of the 1961 Act.

The analysis aims to elucidate the legislative intent, operational mechanics, interpretational nuances, and practical implications of these provisions for business trusts, their unit holders, and other stakeholders. Further, it highlights the continuity and changes proposed in the new Bill vis-`a-vis the extant law, and identifies areas that may require further legislative or judicial clarification.

Objective and Purpose

The legislative intent behind both the Income Tax Bill, 2025 and Section 194LBA of the Income-tax Act, 1961 is to ensure tax neutrality, transparency, and streamlined collection on incomes distributed by business trusts. These provisions aim to prevent revenue leakage, clarify the tax treatment of different income streams (rental, interest, and others), and align the Indian tax framework with international best practices for pass-through entities. The focus on TDS mechanisms is designed to facilitate compliance and early tax collection, reducing the administrative burden on the tax authorities and the risk of evasion.

Detailed Analysis of Clause 393(1)[Table: S.No. 4(ii)], Clause 393(2)[Table: S.No. 6 & 7], and Clause 393(4)[Table: S.No. 5, 13] of the Income Tax Bill, 2025

1. Clause 393(1)[Table: S.No. 4(ii)] - TDS on Distributed Income by Business Trusts to Residents

Textual Provision:
This clause mandates that where any distributed income referred to in section 223, as detailed in Schedule V (Table: Sl. Nos. 3 and 4), is payable to a unitholder of a business trust, the business trust shall deduct income tax at the rate of 10% without any threshold limit.

• Payer: Any business trust
• Payee: Resident unitholder
• Rate: 10%
• Threshold: Nil

Interpretation:

The provision applies to all distributed income by business trusts to resident unitholders, provided the income is of the type referred to in section 223 and Schedule V (Table: Sl. Nos. 3 and 4). The absence of a threshold means all such payments, irrespective of quantum, are subject to TDS. The 10% rate aligns with the standard rate for certain investment income, aiming to balance revenue interests with investor attractiveness.

Ambiguities and Issues:

The reference to "section 223" and "Schedule V" necessitates a cross-reference to determine the precise nature of income covered. Typically, these encompass rental income and interest income received by the business trust from a Special Purpose Vehicle (SPV) and distributed to unitholders. The provision does not distinguish between types of distributed income (e.g., rental vs. interest) for residents, applying a uniform rate.

2. Clause 393(2)[Table: S.No. 6 & 7] - TDS on Distributed Income by Business Trusts to Non-Residents

Textual Provision:
Clause 393(2) relates to payments made to non-residents. The relevant entries are:

• S.No. 6: Any distributed income referred to in section 223, being of the nature referred to in Schedule V (Table: Sl. No. 3), payable by a business trust to a non-resident unitholder:
  • 5% for income of the nature in Table: Sl. No. 3.B(a)
  • 10% for income of the nature in Table: Sl. No. 3.B(b)
• S.No. 7: Any distributed income referred to in section 223, being of the nature referred to in Schedule V (Table: Sl. No. 4), payable by a business trust to a non-resident unitholder:
  • Rates in force

Interpretation:

The provision distinguishes between types of distributed income and applies differentiated rates:

• 5% for certain interest income (typically, interest received from SPVs or on specified securities)
• 10% for other specified income (likely rental income or other forms as defined in the referenced schedule)
• 'Rates in force' for certain other types of distributed income, potentially capturing income not specifically categorized or subject to DTAA rates

Ambiguities and Issues:

The use of "rates in force" introduces variability, as it may depend on the applicable Double Taxation Avoidance Agreement (DTAA) or the general rates under the Act. The cross-references to Schedule V require careful analysis to determine which specific incomes attract which rates. The provision's structure is broadly consistent with the existing regime but provides for more granular rates depending on the character of the income.

3. Clause 393(4)[Table: S.No. 5, 13] - Exemptions from TDS on Business Trust Distributions

Textual Provision:
Clause 393(4) lists circumstances where TDS is not required. Relevant entries:

• S.No. 5: Income from units of a business trust referred to in section 393(1)[Table: Sl. No. 4(ii)] - No TDS if the income is of the nature referred to in Schedule V [Table: Sl. No. 3.B(b)], provided the SPV has not exercised the option u/s 200.
• S.No. 13: Income from units of a business trust referred to in section 393(2)(Table: Sl. No. 6) - No TDS if the income is of the nature referred to in Schedule V [Table: Sl. No. 3.B(b)], provided the SPV has not exercised the option u/s 200.

Interpretation:

These carve-outs are significant. They exempt from TDS certain types of income distributed by business trusts if the underlying SPV has not opted for the concessional tax regime (presumably the new regime u/s 200, analogous to section 115BAA under the 1961 Act). The rationale is to prevent double taxation or unnecessary TDS where the SPV is taxed at the regular corporate rate.

Ambiguities and Issues:

The exemption is contingent on the SPV's tax regime choice, which may not be transparent to all unitholders. The definition of the income type (3.B(b)) and the procedural aspects for establishing the SPV's status may pose compliance challenges for business trusts and unitholders. The provision seeks to align the TDS regime with the underlying tax treatment at the SPV level.

Comparative Analysis with Section 194LBA of the Income-tax Act, 1961

1. Textual Provision:
Section 194LBA provides for TDS on certain income distributed by business trusts to their unitholders:

• Sub-section (1): 10% TDS on specified income distributed to resident unitholders.
• Sub-section (2): 5% TDS on interest income (sub-clause (a) of section 10(23FC)) and 10% TDS on other income (sub-clause (b)) distributed to non-resident or foreign company unitholders.
• Sub-section (2A): Exemption from TDS for income of the nature in sub-clause (b) if the SPV has not exercised the option u/s 115BAA.
• Sub-section (3): TDS at rates in force for income of the nature referred to in section 10(23FCA) (typically, rental income from REITs) distributed to non-resident unitholders.

Interpretation:

The section distinguishes between types of income (interest, dividend, rent) and applies different TDS rates depending on the nature of the income and the status of the recipient (resident vs. non-resident). The exemption in sub-section (2A) is designed to avoid TDS where the SPV is not taxed under the concessional regime, thus preventing double taxation.

2. Comparative Table 

3. Practical Implications

• For Business Trusts:
  • The Bill's provisions reinforce the obligation on business trusts to deduct TDS on all relevant distributions, with clear rates and exemptions. The explicit linkage to the SPV's tax regime status requires trusts to maintain robust documentation and communication with their underlying SPVs. Failure to comply may result in penalties and disallowance of expenditure.
• For Unitholders:
  • Resident and non-resident unitholders will continue to receive distributed income net of TDS, with the ability to claim credit or refunds as appropriate. The clarity on rates and exemptions reduces uncertainty, though non-residents must remain vigilant regarding applicable DTAAs and the "rates in force" clause.
• For SPVs:
  • The choice of tax regime (regular vs. concessional) has direct implications for the TDS obligations of the business trust and, by extension, the after-tax returns of unitholders. SPVs must communicate their tax regime choice to business trusts in a timely and transparent manner.
• For Tax Authorities:
  • The Bill's structured approach enhances traceability and auditability of TDS compliance. The detailed tabulation and cross-referencing facilitate enforcement and reduce interpretative disputes.

4. Ambiguities and Potential Issues

• The reliance on cross-references (e.g., to Schedule V, section 223) may create interpretative challenges if those provisions are amended or are ambiguous in themselves.
• The "rates in force" clause for non-residents may lead to disputes over applicable DTAA rates, especially if there are changes in treaty positions or domestic law.
• The exemption based on the SPV's tax regime choice requires a compliance mechanism to ensure that business trusts are aware of, and can verify, the SPV's status. This may necessitate regulatory clarification or guidance.
• The Bill does not materially address the timing mismatch that can occur if the SPV's tax regime status changes during a fiscal year.

Policy Considerations and Legislative Evolution

The move towards a more codified and transparent TDS regime for business trusts reflects a policy intent to encourage the growth of REITs and InvITs as investment vehicles, while safeguarding tax revenues. The alignment with international best practices (pass-through treatment, avoidance of double taxation) is evident. The legislative evolution from Section 194LBA to the proposed Bill demonstrates a maturing approach to the taxation of pooled investment vehicles, balancing investor interests with fiscal prudence.

Conclusion

The provisions of Clause 393(1)[Table: S.No. 4(ii)], Clause 393(2)[Table: S.No. 6 & 7], and Clause 393(4)[Table: S.No. 5, 13] of the Income Tax Bill, 2025 substantially carry forward the legislative intent and mechanics of Section 194LBA of the Income-tax Act, 1961, with refinements in structure, clarity, and cross-referencing. The core principles-differentiated TDS rates based on the nature of income and recipient status, exemption where the SPV has not opted for concessional tax regime, and comprehensive coverage of all distributed income-remain intact. The Bill's enhanced tabular presentation and explicit exemptions are likely to aid compliance and reduce interpretative disputes, though some ambiguities around cross-references and procedural compliance persist. Stakeholders must closely monitor the implementation of these provisions and seek regulatory clarification where needed, especially in relation to the SPV's tax regime status and the application of "rates in force" for non-residents.

Full Text:

Clause 393 Tax to be deducted at source.