The Hindu Business Line : Dividend, tax relief for US-64 — Bail-out unlikely to raise Govt borrowing

THE Government has decided to allow UTI-I to pass on any dividend received from corporates in which it has investments to US-64 unitholders. The unitholders, in turn, will be exempt from paying dividend tax.

It also proposed a capital gains tax exemption for investors offloading US-64 units in the market. Unitholders of US-64 will be given the option of a tax-free bond or a certificate instead of cash redemption. This is being done to retain the unitholders within the scheme and thus reduce the Government's liability in the near term.

The Finance Ministry has also made it clear that UTI I - comprising US-64 and the assured return schemes - will not indulge in "asset bleeding'' or distress sale to meet redemption pressure at least till the end of the current fiscal.

US-64 units will be made tradeable in the market. However, units, once redeemed, will not be re-issued. This is because the Government wants to gradually reduce the old stock of US-64 and the corpus of the scheme.

All sale and purchase of stocks in UTI-II - comprising the NAV-based schemes - will take place based on market perception of its fund managers, the Finance Secretary, Dr S. Narayan, said at a briefing here today.

Any dividend received by UTI-I from corporates in which its assets are invested net of expenses will be passed on to investors by UTI and not retained to improve its net asset value. Such dividend will not be taxable at the hands of the investor.

In other words, if UTI has equity holdings in a particular company, dividend paid by the company will be passed on to the investor and not retained by UTI. The investor, in turn, will be exempt from paying dividend tax. The pass-through for dividend will be available for the current fiscal.

Currently, income from units of open-ended equity funds of the UTI is taxed at concessional rate of ten per cent at the hands of the unitholders. However, UTI has decided not to pay a dividend this year on US-64.

The decision to allow capital gains tax exemption to investors selling US-64 units is expected to help investors or fund managers who are willing to take a long-term view on the stocks of US-64. This class of investors may find the capital gains tax exemption attractive to remain within the scheme.

The Ministry's intention of giving large investors of US-64 - including charitable institutions and trusts - the option of a tax- free bond instead of cash redemption is aimed at lowering the liability arising out of the shortfall between the net asset value (NAV) and the administered repurchase price.

"By offering a tax waiver on dividend and capital gains, the aim is to create a secondary market for US-64 and to fence off the liabilities'', Dr Narayan said.

The shortfall in the US-64 scheme is projected at Rs 6,400 crore. The Government has already provided cash support of Rs 800 crore and another Rs 500 crore is set to be provided either in the second supplementary or the final supplementary demand for grants.

Issuance of bonds to UTI - on the lines of petro bonds - will only be in the next fiscal. The Government will have pay interest on these bonds which will be tradeable in the secondary market. The liability of paying the principal will arise at the time of maturity of these bonds.

Dr Narayan held that the Government was unlikely to breach its budgeted borrowing target of Rs 1,35,000 crore on account of the shortfall in the US-64 and the NAV-based schemes.

"The Government's revenue collections so far are higher than last year. The proceeds from disinvestment have also been higher so far and we expect this to shore up if big ticket divestment deals come through'', he said.

He added that the question of breaching the borrowing target which, in turn, would result in a slippage in fiscal deficit target would arise only if there was a revenue shortfall or overshooting of budgeted expenditure targets.

The Ministry is working on the Ordinance for the repeal of the UTI Act and the advertisements for appointment of professional managers for UTI II will be issued thereafter.

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