Fitch Ratings says that the tax amendment relating to income
Fitch Ratings says that the recent tax amendment relating to income distributed by securitisation trusts to Indian pass-through certificates (PTCs) rated by Fitch may impact ratings if necessary changes to transactions documentation are not made. In most transactions, documentation has already been updated or already includes language covering changes in tax law.
Effective 1 June 2013, the Income-tax Act 1961 was amended so that Indian securitisation trusts are required to pay tax on income distributed to investors. Prior to the amendments, tax on income distributed by securitisation trusts was charged, and paid, at the investor level.
The amendment will result in a reduction of the scheduled interest paid, by an amount equal to the applicable tax to be paid. This will impact all 36 PTCs from 24 Indian ABS transactions rated by Fitch which are backed by commercial vehicles loans or small business loans originated by non-bank financial institutions. According to the transaction waterfalls, tax payments rank senior to payments to the PTC holders.
Fitch’s ratings address the timely payment of principal and interest on each payout date in accordance with the scheduled payouts stated in the transaction documents.
Any non-payment is an event of default (EoD)
Seven of the 24 transactions have existing documentation which states that expenses that arise due to tax changes will automatically reduce the payments to PTC investors. As such, Fitch expects no EoD would be triggered and as a result anticipates no rating action.[source:financialexpress]