Government may issue tax-free bonds

Over the past weeks, the COVID-19 pandemic has emerged as a significant global challenge inducing turmoil in the economies. This outbreak is having a severe impact on people, economy and business. Countries are battling and taking every possible measure to combat the spread of corona virus. One of which is the lock down strategy. Lock down is the last resort and has actually helped to save lives. Along with this, it has invited a huge fiscal gap. This fiscal gap will broaden itself once the lock down is lifted. Lock down has hit the earning and spending cycle at an individual level, which will greatly impact future tax collections.

Government to raise funds:

Government plans to raise short term funds to fulfill temporary need. They plan to raise this money from the RBI through ways and means advances (WMA). Finance ministry suggested the issue of tax-free bonds. Under this, they plan to raise Rs 10,000 crore by giving multiple installments to ensure its success.. However, Rs 10,000 crore may not be sufficient enough for the anticipated immediate expenses.

It is yet under discussion, as to whether bonds should be sold by a direct public issue or issued via a public sector company. Historically, tax free bonds was sold by National Thermal Power Corporation Limited (NTPC), Rural Electrification Corporation (REC) and Power Finance Corporation (PFC). Further, discussions as to how many number of installments should be provided and other terms and conditions are in process. As per the prevailing marginal tax rates, calculation shows that 5.5%, 10-year tax free sovereign instrument will effectively cost 7.7%.

Good news for the retail investors:

Looking at the current scenario, if these bonds are kept open for retail savers and corporations, they will willingly opt for parking their hard earned money into these bonds. After the news of Franklin Templeton freezing 6 of their plans, investors have fear carved in their minds with respect to safe keeping and growth of their capital.

Government will issue these tax free bonds to raise funds for specific purposes. Generally, the funds are raised from debt market by the Central government in the form of weekly securities auctioned by the Central bank. In contrast to last FY target of Rs 4.74 lakh crore, borrowing target of FY21 is marked at a net amount of Rs 5.11 lakh crore.

If retail investors get a chance to participate, this scenario will be the first of its kind and create history. Issuing tax-free bonds to retail savers and corporations will provide them a window of safer investment. At the same time, raising money through these government instruments will over populate the market and increase rates. The CARE estimates reveal that until today, the lock down would have sucked a huge chunk of Rs 1 lakh crore of GST monthly collections.

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