Strategic disinvestment of public sector undertakings has significant tax implications. The Income Tax Act, 2025 provides capital gains exemption for certain transfers in strategic disinvestment scenarios. Understanding these conditions is essential for taxpayers and advisors.
The Statutory Framework
Section 116(3)
Section 116 provides the framework for treatment of accumulated losses and unabsorbed depreciation in amalgamation. It defines "strategic disinvestment" as sale of shareholding by the Central Government or State Government or a public sector company, in a public sector company or in a company, which results in:
- Reduction of its shareholding to below 51%
- Transfer of control to the buyer
Section 70(1)(w)
Section 70(1)(w) provides that the provisions of Section 67 shall not apply to transfer of a capital asset, under a plan approved by the Central Government, by a public sector company to:
- Another public sector company notified by the Central Government
- The Central Government
- A State Government
Capital Gains Exemption Conditions
For Strategic Disinvestment
The capital gains exemption applies where:
- The transfer is under a plan approved by the Central Government
- The transfer is by a public sector company
- The transfer is to another public sector company, the Central Government, or a State Government
For Change in Shareholding
Section 119(4)(f) provides that the provisions relating to carry forward of losses in case of change in shareholding shall not apply to an erstwhile public sector company where the ultimate holding company, immediately after the completion of strategic disinvestment, continues to hold, directly or through its subsidiary or subsidiaries, at least 51% of the voting power of such company in aggregate.
For Amalgamation
Section 116(1)(d) provides that the accumulated loss and unabsorbed depreciation of the amalgamating company shall be deemed to be the loss or allowance of the amalgamated company where there has been an amalgamation of an erstwhile public sector company with one or more company or companies, if:
- The share purchase agreement entered into under strategic disinvestment restricted immediate amalgamation
- The amalgamation is carried out within five years from the end of the tax year in which the restriction ends
Conditions for Exemption
Strategic Disinvestment Definition
Strategic disinvestment means sale of shareholding by the Central Government or State Government or a public sector company, in a public sector company or in a company, which results in:
- Reduction of its shareholding to below 51%
- Transfer of control to the buyer
Control
"Control" shall have the same meaning as assigned to it in Section 2(27) of the Companies Act, 2013.
Erstwhile Public Sector Company
"Erstwhile public sector company" means a company which was a public sector company in earlier tax years and ceases to be so due to strategic disinvestment by the Government.
Practical Implications
For Public Sector Companies
- Ensure compliance with strategic disinvestment conditions
- Maintain documentation of the disinvestment
- Consider the impact on accumulated losses and depreciation
For Investors
- Understand the tax implications of strategic disinvestment
- Consider the impact on loss carry forward
- Ensure compliance with conditions
Expert Legal Guidance
Understanding strategic disinvestment tax provisions is essential for public sector companies and investors. Anuj Desai & Associates provides expert advisory services on Direct Tax Code compliance, helping taxpayers navigate strategic disinvestment transactions.