New Delhi, Sept. 3: The government today announced a series of tax sops for investors in US-64 and other assured income schemes which form part of UTI-I, designed to help staunch redemption pressure on these schemes for which the government is the sole underwriter.
“Sops for popular schemes which have investors running into crores include exemption from income and dividend tax on all dividend earnings, besides waiver of capital gains tax on income from the sale of these holdings,” finance secretary S. Narayan said.
The move flows from government’s fears that it would be faced with a deluge of redemption demands from these funds, adding to its fiscal worries. Finance ministry officials said they hoped the move would spread the risk over a longer time frame, giving UTI some leeway. Narayan, admitted as much, saying: “It is expected that investors and fund managers willing to take a long-term view of US-64 will find it attractive to take advantage of the exemption from capital gains tax.”
Dividend received by the UTI-I from companies in which UTI-1 has invested will be passed on, net of expenses, to investors and not retained to improve NAV. “This will not be taxable in hands of investors.”
The government, he said, had decided that UTI-I will not be allowed to indulge in asset bleeding to meet redemptions; stock sale and purchase in UTI-II will be based on market perception of its fund managers.
Corporate India, worried that UTI stake sales in companies where the management is in minority may trigger take-overs, will be happy.
Narayan said units of assured income schemes will be allowed to be traded freely, a move which could boost confidence in UTI’s assured return schemes. However, units redeemed will be extinguished and UTI-I will not issue anything in their place. Income from such sales will not attract capital gains tax. The government will first try to reset the interest and then foreclose monthly income plans and other assured return schemes under UTI-I, Narayan said.
The ministry is also thinking of issuing interest-bearing tax-free certificates in lieu of units to investors who neither wish to hold on nor totally exit from the scheme after May 2003. The government may offer a nominal interest of 6-7 per cent, which will be tax-free —an effective rate of return of 9-10 per cent.
“We basically wish to increase the range of options,” the finance secretary said. “We are still considering all this and the exact form in which these certificates or bonds will come has yet to be defined.”
The proposed tax-free certificates will be mainly for larger investors like charities, provident funds and institutions, though individuals could also opt for it.
Though the government had indicated it could issue bonds to mop up the money for UTI’s bailout, Narayan said there was no immediate need to do so. The Rs 1,000 crore provided in this budget would meet redemption needs of UTI-I, he added.
The secretary also said the government would take strict action “against all those who are responsible for the mess in which the UTI is in today, based on the recommendation of the Tarapore Committee and the Joint Parliamentary Committee on securities scam.”
On Saturday, the Centre announced splitting of UTI into two parts — UTI-I and UTI-II. While UTI-I, which would control all assured return schemes, would be totally guaranteed and controlled by the government, UTI-II would be run by professionals and eventually privatised. The finance ministry has committed itself to liabilities of over Rs 14,600 crore to meet possible liabilities from assured return schemes.