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Q. Tax free municipal bonds: Comment ongoing issues related to municipal bonds in India.
Apr 10, 2017 Related to : GS Paper-3 Answer-

Ans :

Introduction-

A municipal bond is a debt security issued by urban local bodies to finance its capital expenditures. In India many urban local bodies issues the municipal bonds to meets its capital expenditures like infrastructure development. 

Issue- 

  • Recently it has been reported that the finance ministry of central government has opposed to tax-free municipal bonds, by arguing that it would distort the bond market.  
  • But finance ministry must reconsider its view, because with implementation of Goods and Service Tax, the urban bodies will lose it’s important tax resources like octroi.   

Analysis-

  • Urban local bodies plays major role for overall growth of India. Hence there is an urgent need to empower political executives in charge in municipalities. 
  • Municipal bond is vital to mainstream a financial instrument that will play a key role in building the urban infrastructure that fast-urbanising India will need.
  • Tax incentives for municipal bonds would shore up investor demand and tax-free status will incentivise the supply of municipal bonds.
  • According to some estimates the  tax-free status for municipal bonds would amount to a revenue loss of about Rs180 crore per annum. 
  • Instead of opposing it out rightly, the government could cap the amount it wants to forgo, and invite municipalities to compete to qualify for the benefit, with projects and the fiscal capacity to finance them.
  • Hence policy-makers need to keep the big picture in mind and offer proactive tax incentives for the fledgling municipal market to take wing.

Conclusion-

Urban local bodies are very important growth centres for growth of India and municipal bonds play major role in financing the demand of urban centres. Tax free municipal bonds will further incentives its demand and helps in infrastructure development of urban centres. Hence government instead of opposing, they should offer proactive tax incentives.


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