Lok Sabha clears Bill that will settle Tata-VSNL land issue

Arun Jaitley said in the Lok Sabha that the govt was actively looking at demerging the surplus VSNL land that it owns

The Lok Sabha on Wednesday passed a Bill to expand the definition of “demerger” to facilitate the splitting of erstwhile state-owned companies. The Bill, when enacted, will put to rest the Tata Communications-VSNL surplus land issue and boost the government’s plans for non-core asset sales in large public sector undertakings (PSUs) that have land banks.

The move would also enable Tata Communications to raise non-debt funds, which it was not able to because of the dispute, and improve its debt-equity ratio.

Besides, the Taxation Laws (Amendment) Bill, 2016 would allow the government to increase customs duty on marble to 40 per cent from the current 10 per cent to protect domestic industries from cheap imports. The Bill also seeks to provide income tax benefits to the garment sector.

At present, demergers get capital gains tax benefits. However, the definition does not include in its scope the splitting up of a company that is no longer a PSU as a result of the transfer of its shares to other firms by the government. The proposed amendment aims to rectify this.     

As such, it will help in tax neutral demerger of land from VSNL.  

In 2002, Tata Communications had bought a 45 per cent stake in VSNL for around Rs 1,500 crore. However, VSNL’s land assets were not part of the transaction.

Although the amendment is effective from April, 2017, the wordings suggest that it shall be applicable to splitting of any erstwhile public sector company, Amit Agarwal, partner, Nangia & Co, said.   

“Thus, it appears that the amendment shall facilitate a tax efficient demerger transfer of valuable VSNL land from the Tatas to the government,” he said.  

Earlier in the day, Finance Minister Arun Jaitley also said in the Lok Sabha that the government was actively looking at demerging the surplus VSNL land that it owns.

On widening the definition of term “demerger”, Jaitley said it would help in using a large chunk of the land. “The vacant land can be used for various purposes, including construction of houses for government employees,” he said.

Tata Communications’ shares rose 5.64 per cent to Rs 482.40 on the BSE on Wednesday.

The government will own 51 per cent of the demerged VSNL land entity, while minority shareholders will own 25 per cent and Tata Communications 4 per cent.

“The objective was to provide a tax cushion, while demerging erstwhile PSUs that are no longer in government control but have significant assets, rights of which are attached to the government,” Aggrwal added.

The amendments will also enable PSUs to sell their non-core assets, such as land, on which this year’s Budget had laid emphasis.  “The amendment ought to be seen in light of the government’s plan for divestment of large PSUs that have non-core assets as land banks or licenses,” said Agarwal.

Marble

The Bill would also enable the government raise customs duty on marble and granite from 10 to 40 per cent to protect the domestic industry from imports from countries such as China.

Jaitley said the measure will give the government flexibility to raise duty to the World Trade Organization-bound rate of 40 per cent. The amendments in the Customs Tariff Act will also allow the government to impose quantitative restrictions.

On whether the duty would lead to increase in prices of marble, he said those who can pay higher prices can go in for imported marble.

Garments

The bill also seeks to provide income tax incentives to the garment sector by easing the conditions for availing such benefits. Now, an entity will be able to access these benefits even if it employs workers for 150 days, against the current norm of 240 days.

“The incentive is aimed at making the Indian apparel industry competitive. I am sure with these, the industry would be able to contribute a large number of jobs,” said Jaitley. The sector has been under stress because of falling global demand.