INDIA BUSINESS WORLD - JUNE 2006
THE MONTH THAT WAS...

CENTRE CLEARS 8% MUNIS

  TWO years after the withdrawal of the highly popular tax-free Relief Bonds, investors will soon celebrate the return of a new high-return, tax-free instrument.The Centre has given the go ahead to municipal bonds, better known as munis globally, that will offer 8% tax-free return and carry central government guarantee. The rate of return on these tradable bonds of varying maturities would be equivalent to 11.4% taxable.

Till now only a few municipalities such as Ahmedabad and Nashik have floated bonds. At present, there is a cumulative ceiling on annual municipal bond issuances (of as low as Rs 150-200 crore) and only select issues get a tax-free status. The government has now done away with both these restrictions.

The bonds are part of the government's attempt to give a big boost to development of urban infrastructure. The National Urban Renewal Mission has set an ambitious agenda for investing in urban projects.

While the municipal bodies can issue bonds with coupon rates of more than 8%, they will not be tax-free. Some of these bonds will hit the market in the current fiscal.

The bond issues will be approved by the central government. When the municipal bond market grows, the Centre's control has the potential to become a source of friction between the Centre and the states .

Globally, municipal bonds constitute a huge market. In the US , investors hold about $1.7 trillion worth of municipal bonds.

To take advantage of the scheme, municipal corporations are working on switching over to an accrual-based system of accounting from the present cashbased system. ICAI is already working on the draft norms for the new system, which the municipal bodies are expected to adopt soon.

As of now, only small savings instruments such as PPF, KVP and NSC offer similar tax-free interest. These instruments will taxed under the proposed EET scheme.