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Explained: What government has proposed in new LTC scheme

13th October, 2020 Economy

Context: Finance Minister announces schemes aimed at reviving the economy affected by the coronavirus lockdown.

  • The two sets of measures aims to generate consumption demand and boost capital spending in the economy.
  • The measures announced by the government, along with participation of states and the private sectors, are, projected to create “additional demand” of Rs 1 lakh crore in the economy.
  • The ministry has decided to allow government and private sector employees to use their Leave Travel Concession tax-free benefit for various types of purchases subject to certain conditions while an interest-free festival advance of Rs 10,000 is being given to government employees.

How LTC will benefits?

  • The Central Government employees will be provided tax benefits on LTC component without them having to actually travel.
  • These employees would, however, be required to spend three times of the LTC fare component for purchasing items that attract 12 per cent or more GST.
  • As for the leave encashment component of LTC, the employee will have to spend an equivalent amount towards the purchase of goods that attract GST of 12 per cent or more.

What benefit will it give to the economy?

  • Through the LTC consumption boost plan, the government expects a demand generation of Rs 28,000 crore in the economy.
  • It expects additional demand creation of around Rs 19,000 crore on account of demand from central government employees and Rs 9,000 crore from state government employees.
  • The same benefits will be available to private-sector employees if the employers decide to offer the scheme to their employees and they decide to avail it.

How does it benefit the government’s revenue?

  • A consumption boost from LTC component of the salary of central and state government employees will lift GST collections as the scheme calls for expenditure to be done till March 31, 2021.
  • If private sector employees also participate, it may lead to a significant jump in overall consumption and rise in GST collections.

What is the special festival advance scheme?

  • The government has restored festival advance, which was abolished in line with recommendations of the 7th Pay Commission, for one time till March 31, 2021.
  • Under this, all central government employees will get interest-free advance of Rs 10,000 that the government will recover in 10 instalments.
  • It will be given in the form of a pre-loaded Rupay card of the advance value and the government expects to disburse Rs 4,000 crore under the scheme.
  • If all states provide similar advance, another Rs. 8,000 crores is likely to be disbursed.
  • This is expected to generate consumption demand ahead of festivals like Diwali.

What are the measures to boost capital expenditure and their impact?

  • Special assistance will be provided to states in the form of interest-free 50-year loans of Rs 12,000 crore with certain conditions.
  • States have been categorised among three groups:
    • Group 1 having north-eastern states (Rs 1,600 crore) and Uttarakhand and Himachal Pradesh (Rs 900 crore),
    • Group 2 having other states which will get Rs 7,500 crore in proportion of their share as per Finance Commission devolution, and
    • Group 3 having states which will get total Rs 2,000 crore
  • If they meet three out of four reforms including One Nation One Ration, outlined in the government’s Atma Nirbhar package announced earlier in May.
  • The funds can be used by states for ongoing and new projects and settling contractors’ bills on such projects.
  • The funds provided to states will be over and about their borrowing ceilings.
  • Centre has proposed an additional budget of Rs 25,000 crore for capital expenditure on roads, defence infrastructure, water supply, urban development, allocations for which will be made to various ministries in the upcoming discussions for formulating revised estimates.
  • Capital expenditure has “a high multiplier effect” on the economy and it is expected to boost demand for a number of sectors across the economy.