Amaravati, Patna & Northeast bonds: A mitigant for funding development needs of states who need a big infra push

It’s been widely reported that both Chandrababu Naidu and Nitish Kumar, the chief Ministers of Andhra Pradesh and Bihar have asked for huge financial support or grants from the central government for their respective states. They both are key allies of NDA (National Democratic Alliance), which formed the new Indian government under the leadership of Narendra Modi after the June 24 Lok Sabha election results were declared. Hence it is more than likely that these demands and those of a few other states would need consideration by the central government in the Union Budget and fiscal measures ahead in 2024 and onwards.

While every rupee spent on capital outlays and welfare schemes comes in the Budget from direct and indirect taxes, corporate taxes, excise, non-debt capital receipts, non-tax revenue and borrowings and other liabilities, it’s the borrowings which come at a high coupon rate of 5 per cent and above and are a drain in terms of midterm repayment obligations with interest as many large govt infra projects have a 10-12 year gestation period.

While the government hasn’t given any major tax relief in the last few Budgets, and given the nature of the 2024 popular mandate, it’s unlikely the government can increase any taxes or tax rates from either corporate or from individual taxpayers. Hence it is worthwhile if the government considers a few ideas which it could use, for making up a large portion of these monies required in non-interest-bearing/part interest bearing, debt receipts with a very long-term redemption, easing the burden as well as serving the purpose.

The government, in the Union Budget of July 2024, can come up with a scheme of specified bonds wherein both the central government and the state government can together work out a fundraiser. The government also has time and again declared its intent to move away from the deduction based old regime and move to a new regime of tax which has a higher base of exemption and then no deductions and slightly easier tax slabs than the old regime.

Hence factoring this aspect too, a way forward can be worked out as below:
 
The common framework of these bonds across various options suggested below could be as follows:

1.   For taxpayers to participate one needs to have a PAN card

2.   PAN must be linked with Aadhaar in case of individuals and corporates as applicable

3.   The monies being contributed must not be tainted or be from any dubious source of income or diverted from funds derived by FEMA, PMLA or FCRA violations

4.   There will be amnesty under Option B below only if not found deficient under 3 above. If found deficient the contribution can be forfeited

5.   In Option B, there will be an assessment window of 2 years after making such a contribution and within 24 months, the government will have to clear the file for such contributors and then such contribution cannot be forfeited. This clearance will be through a faceless mechanism and no harassment of the new tax paying cash contributors by ED or CBI suo motto, unless any unrelated trail leads to the contributor

6.   Redemption by nominated relatives/successors as defined in income tax act or legal heirs as defined in law. These bonds cannot be exchanged or traded or can be endorsed or negotiated

7.   Those in government service or public life can avail only option A below

8.   Option B will not be open for liquor, gaming, casino, religious institutions, and such sectors from the prohibited list to be announced. 

9.   In case of Option A and C, the taxpayers can choose which state’s bonds they want to contribute and in case of Option B, the central government will choose the same basis pre agreed norms with finance commission and Union Cabinet and CMs

In case of Option C, the contributions from PE, FPI, VCs can be regulated outside the angel tax regime if contributed for these bonds and such contributions are obtained through automatic route of funding. This will be in indirect FDI in equity form for development of India, through corporate.

There is no interest on bonds in Option B & C. The government can also consider a 2 per cent coupon in Option A, as this largely concerns the middle class. In Option A and C, the payments are to be made only in digital mode.
 
1. Option A – open for Individuals who are already taxpayers

All individuals who wish to contribute can do so by digital mode and maximum up to Rs 1 crore and minimum Rs 2 lakh. The government will give a window of contribution till 31.3.27 and redemption period of 10 years will start beginning 1.4.27 and bonds can be redeemed after 31.3.37. There won’t be any deductions for taxpayers, but for the entire period from the year of making such contribution, till five assessment years after, the taxpayer will get a 1 per cent discount to 3 per cent discount in applicable tax slab rate as per the tax laws.  

The slab of discount would be based on contribution, i.e., if a person has Rs 30 lakh in 24-25 as taxable income and contributes say Rs 4 lakh, the first Rs 5 lakh will get taxed at 4 per cent, next Rs 5 lakh up to Rs 10 lakh at 19 per cent and next Rs 20 lakh at 29 per cent. 

Old regime rates are given here for better understanding. This discount can be availed for five tax returns filed i.e. AY 25-26, AY 26-27, AY 27-28, AY 28-29 and AY 29-30 against a single contribution of 4 lacs. Non-Residents can also subscribe for such bonds thru FNCRE accounts.

2. Option B – Tap the cash economy

The government can open the bonds subscription to those who deal in cash and usually from sectors like agriculture, farm, dairy, marriage, fisheries, horticulture, tourism, real estate, practising professionals like doctors, etc and such various sectors where there are usually individuals or firms having a large portion of their dealings in cash due to nature of the business. These Individuals or LLP or partnerships can also contribute to nation building, by giving them a chance to participate and thereby giving a one-time exemption from compliance or tax penalties imposed for cash transactions under tax laws if they declare and contribute to these bonds. While to some extent it will be a one time amnesty scheme for converting black money in the parallel economy, by bringing it in the main economy.

The window for such schemes can be open for max up to 31.3.25 and minimum one-time contribution to be Rs 5,00,000 in cash deposit to max contribution up to Rs 10 crore in cash deposit, for individual, LLP or partnership firm in these specified sectors can be taken. Also it needs to be done to designated accounts of nationalised banks denominated by central government for this purpose. The redemption timelines will be like Option A, but only 75 per cent will be redeemed on 1.4.37 and 25 per cent of the bond money in 15th year, i.e. 31.3.42.

The cash contributors will have a reduced slab of discount at 0.5 per cent to max 1 per cent on the applicable tax rates for three assessment years following the year in which the assessment window clearance is obtained from the government before 31.3.27.

The slabs will be as follows:

3. Option C – Corporate tax assessee can also contribute:

Corporates (both private or public) can also choose which state bond they want to invest in (one time) and can max contribute up to Rs 100 crore or 5 per cent of positive net worth whichever is lower. Minimum contribution to be Rs 50 lakh. Special resolution and EGM approval will be needed. In case of companies, auditors need to certify that these contributions are made from free reserves of the company and not from borrowings.

The window of making contribution can be like Option A, up to 31.3.27 and redemption in three tranches starting from 7th year and finishing in 9th year where 50 per cent will be redeemed in 7th year, 25 per cent in 8th year and last 25 per cent in 9th year. The redemption starts from 31.3.34 and closes out by 31.3.36. The bonds won’t have any interest coupon but have a better discount rate on corporate tax for five assessment years following the year of making a contribution. Where the corporate assessee have carried forward losses, the period of 5 years can be reckoned after the completion of the 8-year period of BF loss exemption.

i.e. If a company has 25.17 per cent effective tax rate u/s 115 BAA (Say) then the same would be 23.17 per cent, 22.17 per cent and 20.17 per cent for five tax years depending on the contribution range they make.

Conclusion: The effect of all these measures is to mop up capital non-debt receipts in Options B & C and partial interest-bearing debt in Option A. This will ease the burden on the government to then fund all the sectoral outlays from either increased tax base or plain vanilla market borrowings, which have other contenders as well from other states.  The ancillary benefit is creation of new taxpayers in Option B and motivating tax payers in Option A and C to declare more taxable income to avail the discount on taxes.

(The author is a Pune based Chartered Accountant)