Strategic disinvestment: CBDT to exempt deemed taxation of difference in book value and fair value

In order to facilitate the strategic divestment of the public sector enterprise, the Income Tax Department has amended a rule to exempt the purchaser in the event that the shares are sold at less than the fair market value (FMV). The government is working on strategic divestment in IDBI Bank, Shipping Corporation of India, Pawan Hans and HLL Lifecare, among others.

basic pillars

According to the Department of Investment and Public Asset Management (DIPAM), the strategic divestment policy is based on the two basic pillars – no-nonsense minority interest through SEBI-approved methods and strategic divestment combined with the transfer of management control. Strategic divestment from CPSE lies at the heart of the divestment policy. This may mean the sale of a significant part of the government’s shareholding in the Central Public Sector Enterprise (CPSE) of up to 50 percent, or such a higher percentage as may be determined by the competent authority, along with the transfer of administrative control.

The Central Board of Direct Taxes (CBDT), notwithstanding notice, has amended Rule 11 UAC(4) of the Income Tax Rules which deals with one of the exceptions to the applicability of Section 56(2)(x) of the Income Tax Code. The said section states that income is not excluded from total income to apply the “income from other sources” tax.

According to the amendment, this section does not apply to “any movable property, being equity shares, of a public sector corporation or corporation that a person receives from a public sector corporation, central government, or any state government under a strategic divestment policy.” Earlier, this section read “any movable property, being equity shares, of a public sector company, received by a person from the central government or any state government under a strategic divestment policy.”

Facilitate divestment

Explaining the amendment, Amit Agarwal, partner at Nangia & Co LLP, said the amendment is intended to address the potential tax implications of buying shares of a state company under a strategic divestiture. Typically, central government or state government companies that are divested under a strategic divestiture may have a higher book value but a lower fair value, which could result in potential tax consequences for the buyer of that company’s stock. The amendment aims to facilitate the strategic liquidation process through the assumed tax exemption for the difference in book value and fair value.

Furthermore, Sandeep Sehgal, Partner Tax Partner at AKM Global explained, “A strategic divestment by the central or state government of any PSU will not be subject to these taxes as the shares would have been moved below FMV.”

In accordance with the applicable retroactive amendment from AY2023-24, strategic divestment conducted through any PSU will also be covered under the exclusion. This is in line with other provisions to facilitate strategic investments such as Section 72A, which allowed losses to be carried forward to a PSU that was sold and control transferred by the government.

The government aims to get Rs 51,000 crore through divestment which also includes strategic divestment. During 2021-21 and 2022-23, the government has managed strategic investment in two companies – Air India and Nilanchal ISPAT.