The Centre will exempt the potential buyer of IDBI Bank from tax liability on notional gains if the market value of shares sold by Life Insurance Corporation (LIC) is higher than the price discovered through a competitive bidding process. Similar tax concession was made available to the buyers in earlier strategic disinvestment deals where the government is the seller.
On October 7, the Centre invited expression of interest (EoI) and offered to sell a total of 60.72% stake in IDBI Bank, including 30.48% held by the government directly and 30.24% by state-run LIC, along with the transfer of management control.
The provisions of Section 56(2)(x) of the Income Tax Act provide for taxing the difference if the off-market price at which the shares of a company are sold is lower than the market price.
This is an anti-tax evasion measure in case firms deliberately sell stakes in a firm at a lower price than the share market price. Such notional gains are called other income of the buyer and are subjected to 30% tax and applicable cess and surcharge.
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In 2021, the Centre exempted such tax liability on the buyer if equity shares of a public sector company received by a person from the central government or any state government under strategic disinvestment.
The changes were done keeping in mind that the government’s strategic disinvestment transactions take longer and share prices usually rise after financial bids are received in the hope that a private promoter would generate more value in a firm. “Since the tax exemption is already there (if the seller is the government) on the notional gains due to an increase in share price over the winning bid price if the seller is the government, the same would be extended to LIC stake sale in IDBI Bank as it is part of one deal,” the official said.
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The government recently extended the deadline for potential bidders to submit expressions of interest (EoIs) for IDBI Bank to January 7, 2023. The earlier deadline was December 16, 2022.
In the pre-EoI stage, Dipam had received 167 queries from domestic banks/ NBFCs, foreign banks and funds, signalling strong interest for the lender.