In order to facilitate strategic disinvestment of a public sector enterprise, the Income Tax Department has amended a rule to exempt the buyer in case of shares sold below fair market value (FMV). The government is working on strategic disinvestment in IDBI Bank, Shipping Corporation of India, Pawan Hans and HLL Lifecare, besides others.

Key pillars

According to the Department of Investment and Public Asset Management (DIPAM), the Strategic Disinvestment Policy rests on key pillars - minority stake stale by SEBI-approved modes and strategic disinvestment along with transfer of management control. Strategic disinvestment of CPSEs lies at the heart of the disinvestment policy. It would imply the sale of substantial portion of the Government shareholding of a central public sector enterprise (CPSE) of up to 50 per cent, or such higher percentage as the competent authority may determine, along with transfer of management control.

The Central Board of Direct Taxes (CBDT), though a notification, amended Rule 11 UAC(4) of the Income Tax Rules that deal with one of the exceptions to the applicability of Section 56(2)(x) of the Income Tax Act. The said section prescribes income not to be excluded from the total income for applicability of tax “Income from other sources.”

Per the amendment, the section shall not apply to “any movable property, being equity shares, of a public sector company or a company received by a person from a public sector company or the Central Government or any State Government under strategic disinvestment.” Earlier, this section read “any movable property, being equity shares, of the public sector company, received by a person from the Central Government or any State Government under strategic disinvestment.”

Facilitating divestment

Explaining the amendment,  Amit Agarwal, Partner with Nangia & Co LLP, said the amendment aimed to address the potential tax implications to a buyer of shares of a government company under a strategic divestment process. Typically, the Central government or State government companies divested under strategic divestment process may have a high book value but a lower fair value, which could result in potential tax consequences for a buyer of shares of such company. The amendment is aimed at facilitating the process of strategic divestment by exempting deemed taxation of difference in book value and the fair value,” he said.

Further, Sandeep Sehgal, Partner-Tax with AKM Global, explained, “The strategic disinvestment made by the Central or State Government of any PSU shall not be subject to this taxation where the shares could have been transferred below the FMV.”

Per the retrospective amendment applicable from AY2023-24, the strategic disinvestment made through any PSU as well shall get covered under the exception. This is in line with other provisions to facilitate strategic investments such as Section 72A, which allowed carry forward of losses to the PSU which were sold and the control transferred by the Government.

The government aims to get ₹51,000 crore though disinvestment which also include strategic disinvestment. During 2021-21 and 2022-23, the government has managed strategic disinvestment in two companies – Air India and Neelanchal Ispat.