New Delhi, Aug. 10: The Narendra Modi-government today took a significant step towards reclaiming ownership of a part of the 773 acres of surplus land that the Tatas gained control of when the Vajpayee government sold 25 per cent of the equity of Videsh Sanchar Nigam Limited (VSNL) to a Tata group entity, Panatone Finvest Ltd, in 2002 for Rs 1,439.25 crore.

VSNL once held the monopoly over international telephony services in the country, which was terminated in March 2002. It later morphed into Tata Communications.

Under the terms of the shareholders' agreement, Panatone was supposed to demerge the surplus land and park the assets in an entity in which the government would hold a little over 51 per cent stake.

The Tatas had pledged to form a realty firm named Hemisphere Properties India Ltd (HPIL) but the assets could not be transferred because of "certain issues regarding liabilities for duties or taxes", Dayanidhi Maran, Union minister for communications in the Manmohan Singh government, had informed the Lok Sabha in August 2006.

In a filing with the US Securities and Exchange Commission in September 2002, VSNL had said the company and the resultant entity "may have to pay significant capital gains taxes and stamp taxes if the proposed demerger is found by the Indian courts not to fit within the statutory definition of demerger under the Income Tax Act 1961." It estimated the stamp duty at 0.7 per cent of the aggregate market value of the shares issued by the realty entity and the amount of consideration paid for such demerger.

On Wednesday, finance minister Arun Jaitley told the Lok Sabha that the government would waive capital gains tax on the transfer of the land to the entity, paving the way for the demerger of VSNL land assets that have hung fire for close to 14 years.

"Even after 14 years of divestment of VSNL, the land has been in the possession of the investor (Tata Communications). The move of the government through this bill is to take back the land and park it in a special purpose vehicle ... we would have flexibility to use the land," Jaitley said while replying to the debate on the Taxation Laws (amendment) Bill 2016 in the Lok Sabha. The bill was passed by voice vote and will now be taken up by the Rajya Sabha after which the changes will be notified.

The sale had a clause that provided for the demerger of the land held by VSNL to a separate holding company. The clause had made it clear that no benefit was to accrue to the bidder from the demerged land and its sale or any form of revenue and shareholding in the resultant company. The land will be developed for government purposes and not used for private development, said officials.

The amendment will facilitate tax neutral demerger of 773.13 acres of VSNL's land bank. After the amendment, the government will get to own 51 per cent of demerged VSNL land entity, while UTI, mutual funds, banks, FIIs and ADR holders will own 29 per cent of the land entity.

In 2012, the UPA government had estimated the value of 740.63 acres of VSNL land - no explanation being given for the missing 32.5 acres in Chennai - at Rs 6,156.58 crore.

"The amendment removes the ambiguity with respect to split of companies, which cease to be under government control. The amendment ought to be seen in light of government's plan for divestment of large PSUs, which have non-core assets as land banks or licences. The objective of the move is to provide tax cushion, while demerging erstwhile PSUs, which are no longer in government control but have significant assets, rights of which are attached to the government as part of conditions attached to the transfer of shares by the government," Amit Agarwal, partner of chartered accountant firm Nangia & Co., said.

"Although the amendment is effective from April 1, 2017, the wordings of the amendment suggest that the same shall be applicable to splitting of any erstwhile public sector company. Thus, it appears that the amendment shall facilitate a tax efficient demerger transfer of valuable VSNL land from the Tatas to the government," Agarwal added.