Carry Forward Of Losses To Be Permitted For PSUs Under Strategic Divestment
In an effort to smooth the way for strategic disinvestment of public sector units the tax department has decided to allow the carry forward of losses made by such PSUs even after change in ownership. This may help in attracting more buyers for loss making PSUs such as Air India.
In a press statement issued on Sept. 10, the Central Board of Direct Taxes said
Section 79 of the Income-tax Act, 1961—that restricts carry forward and set off of losses for certain class of companies that have undergone change in control—shall not apply to an erstwhile public sector company which has become so as a result of strategic disinvestment.
Loss incurred in any year prior to strategic disinvestment shall be carried forward and set off by the erstwhile public sector company.
This relaxation shall only be available till the new owner of the erstwhile PSU holds 51% of voting power.
"Necessary legislative amendments for the above decision shall be proposed in due course of time," the statement said.
According to Ajay Rotti, partner at Dhruva Advisors LLP, the proposal is aimed at "sweetening" the deal of loss-ridden PSUs. "The current tax laws deny benefit of accumulated losses to the buyer if there is a change of shareholding in excess of 51%," he said. "That's set to be relaxed for PSUs which are strategically divested."
Some of the PSUs have accumulated losses running in thousand of crores. Allowing such losses as set off can be a incentive for proposed buyers to take over such PSUs and this proposal can have a positive impact on the government’s disinvestment plans.Ajay Rotti, Partner, Dhruva Advisors LLP
Shailesh Kumar Nangia, partner at Nangia & Co LLP, explained the position before this amendment. The bar on carry forward on losses applied on sale by shares of an unlisted company so as to preclude “loss shopping”, he said.
"This means that when shares of an unlisted company are bought and there is change in shareholding, the company cannot carry forward its losses accumulated prior to change in shareholding," he said. "And so it cannot set off against its future profits (post change in shareholding)."
While listed companies were already outside the applicability of this provision, the proposed amendment now removes this bar in case of divestment of unlisted PSUs as well, he said.
The new owner of the PSU can carry forward the losses of the erstwhile PSU for up to 8 years, even after change in shareholding from Government to the new strategic owner. The only condition is that the strategic investor (acquiring shares from the Government under divestment) should continue to hold at least 51% shareholding in the erstwhile PSU.Shailesh Kumar Nangia, Partner, Nangia & Co LLP