Covid vaccine expenses: Tax-free bonds may be just what the doctor ordered

Shishir Sinha/Richa Mishra New Delhi | Updated on January 22, 2021


The Centre is looking at introducing an instrument such as a tax-free bond during the Budget to mobilise resources for higher health-related expenses due to Covid-19.

According to multiple government sources, the exact name and nature of the instrument are yet to be finalised, but the aim is to strike a balance between financing additional expenditure and not adding to the tax burden. A formal announcement is expected in the Budget, on February 1.

The government may need to provide ₹50,000-80,000 crore for Covid vaccination during FY22. While introducing a cess or a surcharge would address this, State governments have been objecting to such a levy as they do not get a share of this revenue stream. Hence, a tax-free bond may seem a more viable option to the Centre.

Last year’s Budget had made a provision of ₹67,111.80 crore for health. Then, in the first Supplementary Demands for Grants, approved by Parliament during the Monsoon Session, additional cash outgo of ₹14,231.96 crore was provided.

The Centre has announced that, to start with, three crore people will get two shots of Covid vaccine each for free, which means at least 6 crore shots. This needs to be financed.

Vaccination phase two

On Thursday, the Centre indicated that the Prime Minister may lead the second phase of inoculation covering 27 crore people. However, it is not clear how this will be funded — if the Centre/States will bear the full cost or a part of it, letting the rest be borne by the beneficiaries.

Sources said that considering the inadequate revenue collections, the Centre will need innovative means to meet such expenditure. “The option of cess or surcharge is being discussed, too. There is also the borrowing option, and a tax-free bond,” a source said.

Divakar Vijayasarathy, founder and Managing Partner with DVS Advisors LLP, said the tax incentive is meant to channel the savings habits of the masses towards garnering resources for a specific purpose — with a lock-in period to balance the asset-liability mismatch. The scheme is likely to be allowed as a deduction from the gross total income.

Success formula

He suggested three measures to ensure the scheme’s success: “There should be a moderate lock-in period — a longer one would discourage retail investors. The fund-raise should be for a targeted purpose. And, it should be kept outside the ambit of 80C and allowed as a separate deduction.”

Funding options
  • Cess & surcharge: Quick way to increase revenues, but States likely to object
  • Borrowing: Already, additional borrowing is likely beyond FY21 Budget Estimate of ₹7.8-lakh crore
  • Tax-free bond: Perceived as secure instrument; does not burden taxpayers

Published on January 21, 2021

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