Faltering on privatisation

Tweaking tax laws alone will not help

Union Finance Minister Nirmala Sitharaman had spelt out the government’s new policy on strategic disinvestment in central public sector enterprises (CPSEs) in this year’s Union Budget. The policy, first announced in 2020, 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. The policy was applauded by most stakeholders and commentators as it reflected a clear break from the past in the way the government approached the issue of disinvestment and privatisation over the years. The finance minister also announced that two public sector banks would be privatised this fiscal year. The disinvestment target of Rs 1.75 trillion suggested that the government will aggressively pursue the new CPSE policy.

But that hope is fading as not much has changed in the first half of the fiscal year. The government has raised about Rs 8,300 crore from disinvestment so far in 2021-22. It has reportedly identified the two public sector banks to be privatised, but it’s not clear how and when this would happen. The government is stumbling despite a buoyant capital market where the private sector is raising record sums. In fact, the government has consistently underperformed on this front over the years. It has now tweaked 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.

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. Changing tax laws, however, will not necessarily provide a big push to the government’s privatisation programme. There are two issues worth highlighting here. 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.

To be sure, the government’s privatisation programme is not suffering because of tax rules, and bidders would consider all financial aspects in the valuation. The government needs conviction and a road map to proceed on the privatisation path. For instance, 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, giving potential bidders more clarity. The government needs to approach strategic disinvestment more strategically. Tweaking tax laws would not be enough.