Carry forward of losses in case of change in shareholding due to strategic disinvestment

The Union Budget-2021 underlined the government’s intent and roadmap for disinvestment of public sector enterprises. While delivering the budget speech, Finance Minister Nirmala Sitharaman had emphasised promoting strategic disinvestment. She had also announced that the government has approved the policy of strategic disinvestment of Public Sector Undertaking (PSUs).

Strategic disinvestment refers to the sale of shareholding by the Centre or any State government in a public sector company which results in the reduction of its shareholding along with transfer of control to the acquirer. In order to give an impetus to the disinvestment plan, suitable amendments are made to cover allowability of losses in cases where PSUs will be acquired or merged. The move is reasonable as it will benefit the acquirer in terms of their overall tax liability with loss claim.

CBDT clarification

Central Board of Direct Taxes (CBDT) has now issued clarification regarding carrying forward losses in case of change in shareholding due to strategic disinvestment vide press release dated September 10, 2021. Specific legislative amendments in the Act are expected to carry forward and set off accumulated losses and unabsorbed depreciation on change of shareholding due to amalgamation. The notification is silent on its effective date of applicability.

PSUs and potential acquirers who are in the midst of divestment talks at the moment will have to wait and watch. The scope is wide enough to cover even erstwhile public sector companies. Erstwhile public sector company means a company that was a public sector unit in previous years and ceases its status due to strategic disinvestment. It has been clarified that Section 79 would not apply to such companies. Accordingly, the loss incurred in any previous year prior to, and including, the previous year of strategic disinvestment shall be carried forward and set off by the erstwhile public sector company.

Such loss carries forward will be permissible until the strategic partner holds 51 per cent or more in the PSU post takeover. Suppose X Ltd. is a subsidiary of Y Ltd. Both are PSUs. If the shareholding of Y Ltd. in X Ltd. falls below 51 per cent due to disinvestment, then the benefit under Section 79 as mentioned in the notification would not be available to erstwhile public sector company. However, if the shareholding of Central/State governments in X Ltd. falls below 51% due to strategic disinvestment, the benefit under Section 79 as mentioned in the notification would be available to an erstwhile public sector company.

Under amendment in Section 72A, brought in by Finance Act, 2021, losses/unabsorbed depreciation incurred by PSUs/ erstwhile PSUs were allowed to be carried forward and set off by the amalgamated PSU or acquirer on amalgamation subject to certain conditions. It is known that certain PSUs up for strategic disinvestment are loss-making entities. To make them lucrative proposal for prospective investors, the carry forward of losses shall be allowed.

This notification is a welcome step. However, since legislative amendments are yet to come, it would be interesting to know how provisions would be introduced to boost strategic disinvestment of PSUs while keeping a milder check over relaxations granted.

(Ravi Mehta is Managing Director & Head (Transaction Tax) at RBSA Advisors and Amrita Bhatnagar is Associate Director at RBSA Advisors. The views expressed are personal)