Government tax-free bonds: government can raise up to Rs 10,000 crore through tax-free bonds

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Bombay: Government seeks to raise up to Rs 10,000 crore in its first tax-free bond issue to help close the tax gap, which is expected to widen following Covid-19-induced economic disruption and low collections tax.

The Ministry of Finance has started negotiations with the bankers on a probable issue of tax-free bonds. The money can be collected in installments, people familiar with the plan told ET.

“We are in talks with bankers and other resources regarding the launch of such a show,” said one of them.

The government plans to raise temporary funds from the central bank through Ways and Means Advances (WMAs), a short-term borrowing window. However, that might not be enough to cover the immediate expected expenses, the people named above said.

The structure of the issue and the number of installments remain to be determined. The government can either sell the bonds as a direct public issue or use a public sector company to raise the funds. State-run utilities and financiers such as REC, Power Finance Corp. (PFC) and sold tax-free bonds a few years ago.

“The finance ministry, Niti Aayog and the prime minister’s office are involved in the talks,” said an executive familiar with the plans. Niti Aayog and government agencies did not respond to questions.

Investment option for retail investors

If taxes were to be applied to a 10-year bond offering 5.5% tax-free, the effective cost would be 7.7%, if the current marginal tax rate applied to the investment.

According to bankers, these bonds could also offer an investment option for retail savers, who now consider debt mutual fund programs rather risky after Franklin Templeton decided to freeze six plans. If successful, this bond sale would be one of the first such issues in which retail investors could also participate in a non-taxable sovereign instrument.

The Center normally raises funds in the debt market, where the Reserve Bank of India (RBI) acts as an investment banker, auctioning securities weekly. The government has set itself the target of borrowing a net crore of Rs 5.11 lakh in FY21, against Rs 4.74 lakh crore the previous year.

The gross borrowing is set at Rs 7.8 lakh crore, against Rs 7.1 lakh crore a year earlier.

“Budget slippages are definitely on the anvil due to declining tax collection,” said Madan Sabnavis, chief economist at CARE Ratings. “Granting tax-free bonds will pave the way for savers and businesses to invest. But raising funds through G-Secs will flood the market and increase returns. ”

A nationwide lockdown means that much of the Rs 1 lakh crore from monthly GST collections has slipped, according to CARE estimates. “Moreover, divestment cannot be achieved,” Sabnavis said.


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