Government makes divestment of IDBI Bank smoother

Addressing the tax gaps

When the decision to sell a 60.72% stake in IDBI Bank was kicked off by the government, the one big open issue was about the stake sold by LIC in IDBI Bank. Here is why this matters. Currently, in any divestment, there are no tax implications for a potential buyer even if the fair value determined by the sale process is lower than the market value. In non-government sales, such a discount would be treated as notional income in the hands of the buyer and treated as other income. Now the CBDT has clarified that the exemption from taxes on capital gains will apply to the shares in IDBI Bank sold by LIC also. 

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Ownership of IDBI Bank

Currently, the predominant ownership of IDBI Bank is split between the government of India and LIC. While the government of India holds 45.48% in IDBI Bank, LIC holds 49.24% in IDBI Bank, taking their combined stake to 94.72%. The balance is held by the public. Technically, LIC is 96.5% owned by the government of India and so even if you look at effective government ownership, IDBI Bank is still a government owned company. But exemptions do not work like that and they need an affirmative view from the tax department. Now, the CBDT has clarified that the stake bought by the buyer from IDBI Bank would also not be subjected to any kind of tax implications on price basis.

Not just the state, but state entities too

What the CBDT has now clarified is that even if the stake is sold at below the market value; either by the government of India or by LIC, the sale would still not attract any form of tax implications. This comes as a great boon to the eventual buyer of IDBI Bank as they will not have to put up with any form of tax hounding in the future. The process of sale that began in January 2023, saw several expressions of interest (EOI) received. The government will be selling 60.72% stake in IDBI Bank overall out of which the government of India will sell 30.48% stake while LIC will sell 30.24% stake in IDBI Bank. Post the issue, the government of India will hold 15% in IDBI Bank while LIC will hold 19% stake. The combined stake of the government and LIC in IDBI Bank would be 34%, still sufficient to block any special resolution.

Under Section 56(2) of the Income Tax Act

As per Section 56(2)X of the Income Tax Act, there is a provision to tax the difference if the off-market price at which the shares are sold to the strategic investor is lower than the average market price. The confusion, in this case, had arisen since IDBI Bank is explicitly classified as a private bank by the RBI for its banking purposes. However, the latest CBDT clarification puts these concerns to rest. Irrespective of the price at which the stock of IDBI Bank is eventually sold to the potential buyer, there would not be any tax implications for the buyer. That gives sufficient comfort level to the bidders. This is just an anti-tax evasion measure, but that will not be applicable in this case.

Logic for this waiver in government stake sale

There is an interesting logic for this exemption in government sale transactions. Since government divestments take longer, there is scope for the price to move up since privatization itself is price accretive. In short, the potential buyer brings in the value and taxing them for such value creation would be unfair to them. Of course, private transactions will continue to attract this tax under Section 56(2)X. For now, it makes the IDBI Bank stake sale smoother.

Content Source: Financial Express