According to the National Electricity Plan (Transmission) 2024, released by the Central Electricity Authority (CEA), the country will require capital investments worth Rs 9.16 trillion in the transmission sector till 2031-32. A large share of this investment will be led by central transmission utilities such as Power Grid Corporation of India Limited (POWERGRID). As per the plan, over 50 per cent of the capacity addition will be undertaken at the state level. As a result, it is likely that state transmission companies (transcos) may be put under fiscal stress. Asset monetisation offers a solution to unlock the value embedded in operational infrastructure.
For transmission infrastructure, monetisation strategies are broadly categorised into two asset types: brownfield assets, which are already operational and revenue-generating; and greenfield assets, which require fresh capital for construction and commissioning. Among brownfield options, infrastructure investment trusts (InvITs) have gained prominence. InvITs enable public transmission utilities to pool operational projects and raise long-term capital from institutional investors. These vehicles offer investors a predictable return profile through periodic distributions, underpinned by availability-linked transmission charges. POWERGRID’s InvIT, for instance, demonstrated the viability of this model by monetising commissioned assets under tariff-based competitive bidding with fixed revenues for 35 years.
Another brownfield route is the acquire-operate-maintain-transfer (AOMT) model, which allows private players to lease existing transmission assets from state utilities for a defined concession period. Under this model, the private entity takes over operations and maintenance responsibilities and earns revenue from the asset for the duration of the contract, after which ownership reverts to the sponsoring utility. To support capital recycling at the state level, the Ministry of Power issued a dedicated framework in 2022 for monetising intra-state transmission assets through the AOMT model. At the end of the agreement, the asset is mandatorily returned to the sponsoring utility at a nominal cost of Re 1.
However, financial and regulatory implications related to capital gains on asset transfers between entities, various key tax implications/considerations under each step of the transaction, and related tax incidences need to be carefully understood under this model.
To clarify these issues, the CEA recently outlined a framework for monetising public transmission assets under the AOMT model. A closer look at the concept note…
Transaction steps and options for transfer of assets under AOMT
There is a three-step transaction process, beginning with the hive-off of operational assets from the sponsoring state utility to a newly formed special purpose vehicle (SPV). The identified assets are transferred into this SPV using one of three possible mechanisms: slump sale, demerger, or direct asset transfer, with each having distinct legal and tax considerations. Once the SPV has been established, the second step involves transferring 100 per cent of its shareholding to a private investor through a competitive bidding process. The selected investor, referred to as the proposed buyer, takes operational control of the SPV for the duration of the concession period. This structure enables the private party to undertake operations and maintenance responsibilities while generating returns from the revenue streams of the monetised asset.
In the final stage of the transaction, upon completion of the concession period, the shareholding of the SPV is mandatorily bought back by the original state utility. This repurchase is executed either at a nominal value of Re 1 or at the remaining undepreciated asset value, as defined under Rule 11UA of the Income Tax Rules. The overall structure is designed to be fiscally neutral for the state while ensuring continuity of service and revenue certainty for private investors.
Tax implications and considerations
As per the concept note released by the CEA on the tax implications of the monetisation of intra-state transmission infrastructure under the AOMT model, treatment of asset monetisation under the AOMT model is contingent upon the method used for transferring assets from the sponsoring transco to the SPV, and the subsequent sale and reacquisition of the SPV’s shareholding. According to the concept note, if the hive-off of assets along with directly linked liabilities qualifies as an “undertaking”, it falls within the ambit of Section 50B of the Income Tax Act, 1961, which governs the tax treatment of slump sales.
Under the first option, a slump sale or the transfer of assets from the transco to the SPV is treated as a taxable transaction, with capital gains computed based on the differential between the asset’s fair market value (FMV) and its cost base. If the transfer is undertaken at FMV, it is likely to result in nominal capital gains, since the consideration and cost base would be nearly identical. However, the transaction must withstand scrutiny under general anti-avoidance rules (GAAR), which could apply if the slump sale is deemed to lack commercial substance or is primarily structured to obtain a tax benefit. For instance, if assets are transferred at book value and then sold at a significantly higher price, tax authorities could invoke GAAR to challenge the structure.
In the case of a demerger, the transaction may be eligible for tax neutrality under Section 2(19AA) of the Income Tax Act, provided the SPV is classified as a government entity and the demerger satisfies certain conditions. If eligible, the demerger route allows for a tax-exempt transfer of assets from the transco to the SPV. However, stamp duty implications remain and must be assessed based on applicable state laws. Any subsequent sale of SPV shares may attract long-term capital gains (LTCG) tax at a concessional rate of 14.56 per cent, assuming the holding period exceeds 24 months.
When a direct asset is transferred, it may be structured in a tax-neutral manner under Section 47(VIIAF), which exempts transfers between government entities under an approved plan. This requires explicit notification of the SPV and approval of the transaction by the central government. If these conditions are not met, the transaction will attract short-term capital gains (STCG) tax at the prevailing corporate rate of 34.94 per cent. Additionally, goods and services tax (GST) may apply depending on the nature of assets transferred.
Following the asset transfer, the next phase involves the sale of 100 per cent SPV shareholding to a private investor through a competitive bidding process. This sale is treated as a transfer under Section 2(47) of the Income Tax Act. The gains from such a transfer are taxed depending on the holding period. If the shares are held for less than 24 months, it may be the case for an STCG; otherwise, an LTCG. In most scenarios under the AOMT model, the time gap between SPV incorporation and sale is expected to be less than 24 months, thereby triggering STCG at the corporate rate. Additionally, a nominal stamp duty of 0.015 per cent is applicable on the share transfer. In some cases, a repatriation tax may also arise if the proceeds are distributed to the state government via dividends. After the repurchase around the conclusion of the concession period, if the shares are reacquired at a price significantly below their FMV, Section 56(2)(x) of the Income Tax Act may apply, treating the difference as income from other sources in the hands of the transco. To mitigate this, the note suggests that the buyback be structured at the FMV as defined under Rule 11UA of the Income Tax Rules.
Overall, the preferred route for most states may be the demerger option, given its potential for tax neutrality and lower exposure to GAAR risks. However, the tax outcome will ultimately depend on the specific structure adopted, the timelines involved, and compliance with the procedural safeguards laid out in the Income Tax Act and relevant state stamp duty regulations.
Summary of tax implications and considerations
With state transmission utilities expected to shoulder over half of the planned capacity additions by 2031-32, monetisation of brownfield assets has emerged as a critical tool for capital recycling. While InvITs have provided a successful model at the central level, the AOMT framework enables similar outcomes for intra-state infrastructure by facilitating time-bound private operation of de-risked, revenue-generating assets.
The note clarifies that the tax treatment depends significantly on the chosen transaction structure, whether slump sale, demerger or direct asset transfer, with variations in exposure to capital gains, stamp duty, GAAR risk and GST. The requirement of reacquiring the SPV at the end of the concession period adds a layer of complexity, particularly with respect to anti-abuse provisions under Section 56(2)(x) of the Income Tax Act. While each option has trade-offs, the framework provides flexibility to states to optimise for both fiscal impact and regulatory certainty.
