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.
Those wanting to invest more than 50% to save tax will be allowed to do
so. The Bank Recapitalisation Scheme, as this proposal is being called,
will be voluntary for employees with lower salaries (those in the Rs
5,200-20,200 bracket) and pensioners.
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. Those wanting to invest more than 50% to save tax will be
allowed to do so. The Bank Recapitalisation Scheme, as this proposal is
being called, will be voluntary for employees with lower salaries (those
in the Rs 5,200-20,200 bracket) and pensioners.
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 this Bank Recapitalisation Scheme," 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 capitalise
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 ..
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.
Read more at:Economic Times
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