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As a sweetener to privatize the ailing national carrier Air India Ltd, the Central Board of Direct Taxes (CBDT) on Friday said that the buyer of a state-run company can carry forward losses of the erstwhile state-owned company and claim up to 30% tax rebate annually.

“In order to facilitate strategic disinvestments, it has been decided that Section 79 of the Income-tax Act, 1961, shall not apply to an erstwhile public sector company, which has become so as a result of strategic disinvestment. Accordingly, the loss incurred in any previous year prior to, and including, the previous year of strategic disinvestment shall be carried forward and set off by the erstwhile public sector company. The above relaxation shall cease to apply from the previous year in which the company, that was the ultimate holding company of such erstwhile public sector company immediately after completion of the strategic disinvestment, ceases to hold, directly or through its subsidiary or subsidiaries, 51% of the voting power of the erstwhile public sector company," the finance ministry said in a statement.

The finance ministry said necessary legislative amendments for the clarification will be proposed in “due course of time".

A tax partner with a law firm, requesting anonymity, said while the intent of Section 79 was to remedy the mischief of avoidance of tax through carrying forward losses during change of ownership, the section was technically getting applied to such strategic disinvestment of PSUs. “In the case of strategic disinvestment of a PSU, the intent is not to avoid tax. The implication of it would be that the buyer would have the advantage of offsetting losses against future profit of his business. The cap for carrying forward such losses is eight years. It would also mean the funding for the buyer will come from his future tax savings. This is not unfair," he added.

Air India, which has suffered losses every year since its merger with Indian Airlines in 2007-08, has accumulated losses to the tune of 70,820 crore till 31 March 2020, minister of state for civil aviation V.K. Singh told Rajya Sabha in August.

Responding to a question from a member of Parliament, Mahesh Poddar, Singh said major reasons for Air India’s losses include high-interest burden on debt, increase in competition, especially from low-cost carriers, high input cost, and the adverse impact of exchange rate fluctuation.

The government aims to conclude the sale of Air India before March. So far, the Tata group is considered to be the front-runner. The national carrier, which has never made a net profit since its merger with Indian Airlines in 2007, has incurred a loss of about 9,500- 10,000 crore in the year ended 31 March, up from the 8,000 crore loss recorded in the previous year, a senior official of the airline had earlier told Mint.

The airline reported losses of 7,982.83 crore (provisional) in 2019-20, 8,556.35 crore in 2018-19, and 5,348.18 crore in 2017-18. While the government remains committed to Air India’s privatization, the carrier’s liabilities are expected to cross $20 billion by 2024-25, including losses reported during FY21 and FY22 due to the pandemic, aviation consultant Capa India said in its India Aviation Outlook FY22.

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