Faltering on privatisation

Synopsis: Despite ambitious disinvestment targets, the pace on this front has ben slow. Govt has tweaked tax laws to change that, but the government needs to approach disinvestment more strategically. Just modifying tax laws would not be enough. 

Introduction 

Recently government released new policy on strategic disinvestment in central public sector enterprises (CPSEs). The policy intends to keep a bare minimum presence of CPSEs in strategic sectors and privatise the rest or shut down.

The government classified sectors such as atomic energy, defence and space, transport, power and minerals, and financial services as strategic. A disinvestment target of Rs 1.75 trillion has been set. 

What has been the status of disinvestment? 

The government has raised about Rs 8,300 crore from disinvestment so far in 2021-22. The pace of disinvestment is slow and has not picked up.

What changes have been proposed?

Govt has now modified the tax law to make privatisation easier. According to a recent clarification issued by the Central Board of Direct Taxes, subject to conditions, Section 79 of the Income-Tax Act will not apply to CPSEs undergoing strategic disinvestment.

Consequently, the buyer of a loss-making CPSE will be able to carry forward accumulated losses and unabsorbed depreciation. This will allow the new owner to offset these against future profits.

Benefits: The change will make loss-making CPSEs on the block comparatively attractive. A profitable company would be able to save taxes after acquiring a loss-making CPSE. There are two issues worth highlighting here. 

What are the issues in making recent changes? 

First, although the option of tax adjustment against accumulated losses of CPSEs might increase their valuation, the exchequer will lose out in terms of future tax flows. Thus, a higher valuation may only be optical and eventually result in little or no fiscal gains.  

Second, creating special provisions for CPSEs distorts the market and is against the basic idea of a functioning market economy. For instance, the government recently decided to exempt listed CPSEs from the shareholding norms. 

On what lines government should make policy on privatization? 

The government needs to ensure that privatisation programme is not suffering because of tax rules. The government needs conviction and a road map to proceed on the privatisation path. 

It needs a clear and transparent mechanism to value loss-making unlisted CPSEs.

Further, it needs to have a clear plan for the employees of CPSEs as their terms of employment may change radically after privatisation.

There should be a ready list of CPSEs to be privatised over the medium term, which will allow addressing potential problems in different firms well in advance. 

Source: This post is based on the article ” Faltering on privatisation ” published in the Business Standard on 14th September 2021.