CBDT removes Fair Market Value (FMV) hurdle to Disinvestment

  • June 2, 2023
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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CBDT removes Fair Market Value (FMV) hurdle to Disinvestment

Subject : Economy

Section: Fiscal Policy

  • Income Tax Department has amended a rule to exempt the buyer in case shares are sold below the fair market value (FMV).
  • Cent­ral Board of Dir­ect Taxes (CBDT), through a noti­fic­a­tion, has amended Rule 11 UAC(4) of the Income Tax Rules that deals with one of the excep­tions to the applic­ab­il­ity of Sec­tion 56(2)(x) of the Income Tax Act.
Sec­tion 56(2)(x)

Section 56(2)(x) is anti tax-avoidance provision, and seeks to impose tax on certain assets, that were received or transferred for an inadequate consideration.

Why needed ? 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 aimed to address the poten­tial tax implic­a­tions for a buyer of shares of a gov­ern­ment com­pany under a stra­tegic divest­ment pro­cess.

Stra­tegic Dis­in­vest­ment Policy

Depart­ment of Invest­ment and Pub­lic Asset Man­age­ment (DIPAM) oversees the Stra­tegic Dis­in­vest­ment Policy. The policy rests has two types of disinvestment:

  1. Minor­ity stake stale by SEBI ­approved modes
  2. Stra­tegic dis­in­vest­ment along with trans­fer of man­age­ment con­trol. This is the mode on which India’s disinvestment policy is formed.

Strategic Disinvestment

  • It is the sale of 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.
  • Gov­ern­ment is work­ing on stra­tegic dis­in­vest­ment in IDBI Bank, Ship­ping Cor­por­a­tion of India, Pawan Hans and HLL Life­care
  • Dur­ing 2021­-23, the gov­ern­ment has man­aged stra­tegic dis­in­vest­ment in two com­pan­ies – Air India and Neel­an­chalIspat. The gov­ern­ment aims to get ₹51,000 crore through dis­in­vest­ment.
CBDT removes Fair Market Value (FMV) hurdle to Disinvestment economy