IDS II to fund Pay Commission, PSB recapitalisation: BofA-ML

The government is expected to raise Rs 1,00,000 crore of additional taxes under the Income Disclosure Scheme II (IDS II), which in turn will help in containing the 2017-18 fiscal deficit, says a report.
According to Bank of America Merrill Lynch (BofA-ML), besides containing the fiscal deficit, the additional taxes under the IDS II would fund the 7th Pay Commission as well as recapitalise PSU banks without cutting back on public capex.
"We continue to expect the government to raise about Rs 1,000 billion/0.7 per cent of GDP of additional taxes under Income Disclosure Scheme II," BofA-ML said in a research note.

It further noted that "this should allow Finance Minister Jaitley to hold the FY18 fiscal deficit at 3.5 per cent of GDP - same as FY17's - and at the same time fund the 7th Pay Commission and recapitalise PSU banks, without cutting back on public capex".
The government on December 16, had announced that the second Income Disclosure Scheme (IDS II) will run till March 31. Under this scheme, black money hoarders would have time until March-end to come clean by paying 50 per cent tax on bank deposits of junked currencies post demonetisation.
For those holding unaccounted cash, it offered new tax evasion amnesty scheme wherein 50 per cent tax will be charged on declarations and a quarter of the total sum be parked in a non-interest bearing deposit for four years.

Regarding how much can the government get by way of 'special dividend' from the RBI, BofA-ML said "about Rs 1,000 billion/0.6 per cent of GDP, we continue to estimate, although we believe that the RBI should reduce 2017 OMO instead."

An open market operation (OMO) is a market operation conducted by RBI by way of sale/purchase of government securities to/from the market with an objective to adjust the rupee liquidity conditions in the market on a durable basis.
The report further noted that "about Rs 14,000 billion of the Rs 15,300 billion of demonetised Rs 500/1000 has already returned to the banks "in line with our expectations".

"If the RBI passes this as a 'special dividend' to the fiscal, it will allow Budget 2017 to step up social sector spend and public investment," it added.
Meanwhile, RBI Governor Urjit Patel earlier this month had said that "Actually, the withdrawal of legal tender characteristics status does not extinguish any of RBI's balance sheet. Therefore, there is no implication on the balance sheet as of now. The question of a special dividend automatically does not arise as of now.