Tata Motors Demerger: Decoding PV-CV Cost Split, Income Tax Law Implications

Tata Motors Ltd.'s commercial vehicles segment debuted on the exchanges on Nov. 12, marking the conclusion of the demerger between the passenger vehicle and the commercial vehicle segment, with the passenger vehicles stock named Tata Motors Passenger Vehicles Ltd.

With regards to the current demerger, since the shares of the new company may not be declared as to have been acquired before Jan 31, 2018, the benefit for the same might not be available.

In this case, the proportionate original cost of shares would be available as cost of acquisition of shares.

However, by applying of grandfathering provisions under Income tax laws, the fair market value testing would be done with the existing shares of the old company and proportionate cost of those shares would be considered as cost of acquisition of shares in the new company.

For example, if the net assets of Tata Motors before the demerger is 100, the net assets remaining in Tata Motors after the demerger in Tata Passenger Vehicles is 60 and the net assets transferred to Tata Commercial Vehicles is 40.

In the first scenario, where shares of the firm were acquired after Jan 31, 2018, if the year of acquisition is 2021 and the acquisition price is Rs 300, the cost of acquisition for shares in Tata commercial vehicles will be Rs 120 and cost of acquisition for share in Tata passenger vehicles will be Rs 180.

In the second scenario, where shares of the company were acquired before Jan. 31, 2018, it can go two ways.

The first way would be the influence of the shares of Tata Motors (as a whole) being listed on Jan. 31, 2018, therefore, making the highest trading price as on Jan. 31, 2018, being considered as deemed cost of acquisition.

If the year of acquisition is 2005 and acquisition price is Rs 100, the deemed acquisition price would be Rs 400.95.

Cost of acquisition for shares in the Tata consumer vehicles would be Rs 160.38 and cost of acquisition for shares in Tata Passenger Vehicles would be Rs 240.57.

The second way would be regarding the deemed acquisition cost of Tata consumer vehicles with the indexation benefit.

If the year of acquisition is 2005, acquisition price is Rs 100, and indexation of the year 2004-2005 is 113, and indexation of the year 2017-2018 is 272; then the deemed acquisition cost without indexation benefit is 40 and the acquisition cost with the indexation benefit would be 96.28, making the cost of acquisition of shares for Tata Passenger Vehicles: Rs 240.57.