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Suresh Krishnamurthy

THE announcement of a special `tax sops' package for investors in US-64 created hopes of a good deal to go with the Special Liquidity Package already in place and induce them to stay beyond May 2003, which was the government's intent. But the tax benefits announced are not material enough for an investor to stay with the scheme.

Any investor would be better off accepting the special repurchase price in May 2003 and exiting the scheme rather than stay with the scheme.

Immaterial dividends: The exemption from tax on dividends received from US-64 is applicable only for this fiscal. Importantly, it is applicable only for the amount of equity dividends received by US-64. Such dividends amounted to around Rs 200 crore in the year ended June 2002 and may be less this fiscal.

The benefit is likely to be restricted to around 10-20 paise per unit. Thus the investor may do well to stay on till July 2003, get the dividend and then exit. If you exit in May 2003, the Rs 12 per unit you get will fetch you an income of only around 5 paise after taxes for a period of 30-45 days. So, get the dividend and exit. Overall, dividend tax exemption is not at all material for investors to consider staying for longer.

No capital gains either: Some investors in US-64 may even view the capital gains tax exemption as a cruel joke. The capital gains tax exemption is applicable only if there are any gains.

When an investor sells at Rs 12 or Rs 10 to UTI, or in the market at Rs 7, units that he bought at over Rs 12, where is the question of gains? Most investors who entered in the 1990s will be booking losses, not gains, when they sell. As such, to give a capital gains tax exemption when investors are booking losses may be interpreted as a fiscal prank.

What the capital gains tax exemption does is make it relatively attractive to buy units from the secondary market. It does not make holding the units attractive. This will happen only if the NAV of US-64 will be above your purchase price at some point of time in the near future.

The NAV per unit is now around Rs 6. To reach Rs 15 in four years, the NAV has to appreciate 25 per cent annually. To reach there in three years, the annual growth has to be 36 per cent. Even funds 100 per cent invested in equities are not expected to grow at such rates.

In addition, activity in the secondary market is unlikely to pick up. When you can get Rs 12 or Rs 10 from UTI, why would any one sell in the market for Rs 7 per unit? And why would anyone buy when returns may not match the risks.

No innovation: The tax sops that have been announced could have been more innovative.

For example, for investors who stay with the scheme for a year or more, any capital loss could have been allowed to be set-off against any income. Tax laws now allow set-off only against capital gains. Or, investors could have been given a tax rebate based on the number of years they choose to stay with the scheme beyond April 2003.

Innovative tax sops that would calibrate the redemption pressure on UTI were the need of the hour. Such a package would have reduced the adverse impact on the budget, taxpayers, industry and the capital market. Unfortunately, the tax incentives are quite immaterial.

Bail-out impact: Yes, such a package would have increased the total bailout cost over and above the Rs 9,700 crore that is likely. However, if the bailout is spread over a number of years, the present value of the bailout costs may have been lower.

Besides, the bailout costs cannot be seen in isolation. The total cost involves the adverse impact on the Budget, taxpayers and the capital market. A package that reduced the impact on these sections without affecting the interest of investors in US-64 and Monthly Income Plans was needed. Now taxpayers and investors in the capital market have to brace themselves for the fallout of this exorbitant bailout package.

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