New
Delhi: The central government is considering a proposal under which 50% of
arrears of higher-income central government employees under the
7th Pay Commission will be compulsorily invested in bank capitalization bonds.
The proceeds will be used to recapitalise banks without additional pressure on
the fiscal.
While
this will result in less cash in the hands of higher-income employees, as a
sweetener they will get income tax rebate on the amount invested.A
finance ministry official confirmed that preliminary discussions around this
proposal were held at a meeting on Thursday, but no decision on its
implementation was taken. “The issue was discussed. We are looking at all
options,” he said.
“The
proposal entails that through a provision under Income Tax Act, tax rebate
should be offered to all employees receiving extra salary income through pay
commission in the year 2016-17 and 2017-18, provided the money is invested in
the bond,” added the official.The
government will have to additionally shell out Rs 40,000-50,000 crore annually
on account of implementation of the seventh pay commission recommendations with
effect from January 1, 2016.
If
this proposal is accepted, a portion of this money will be used to capitalize
banks.According
to finance ministry estimates, state-run banks will require Rs 1.8 lakh crore
of additional capital in the next four financial years, of which Rs 70,000
crore will be provided by the government.
The
government has budgeted Rs 25,000 crore for bank capitalisation in the current
fiscal. While the government has said it has made adequate provision in the
Budget to cover the extra spending on account of the pay commission
recommendations, analysts reckon it is not adequate and full implementation of
award will make it difficult to achieve the fiscal deficit target of 3.5% of
GDP.
“Increase
in government employee wages and pension expenditure on account of seventh pay
commission recommendations is not fully provided for in the Budget,” Morgan
Stanley had said in a report.The
proposal currently under consideration gives the government the leeway to meet
both its pay commission and bank capitalisation commitments without putting the
fiscal deficit target under threat. Bonds will provide the exchequer some
wriggle room. The payment will become due when bonds mature, leaving the
government with only the interest payment liability in the current fiscal.
The
flip side is that the proposed scheme could annoy government employees
expecting a greater take-home pay. Hence the scheme has a tax exemption
lollipop.A
second government official said this amount will be used to recapitalise banks
through a special bank capitalisation fund that will invest in perpetual
non-redeemable preference shares issued by banks. Banks will pay 5.1% dividend
that is also proposed to be exempted from the dividend distribution tax. The
fund will in turn pay 5% interest to government employees, retaining 0.1% as
administrative charge.
“This
interest income will also be tax free for government employees,” he said, which
will increase the effective yield. The government will eventually pay back the
amount in four equal investments after 8, 9, 10 and 11years, spreading the
fiscal burden of repayment over that period. It will guarantee payment of 5%
interest and repayment of deposits irrespective of whether the banks pay the
dividend or not, the official added.
