Federal Finance Minister Ishaq Dar while chairing a meeting to review the performance of National Savings Schemes (NSS) directed that the 10 percent tax that was recently imposed on two products notably the Pensioners Benefit Account and Behbood Savings Certificates be withdrawn. The National Savings website explains the rationale for launching these two products: "keeping in view the hardships faced by the widows and senior citizens, Behbood Savings Certificates (BSCs) with a 10-year maturity period were launched by the Government of Pakistan on July 30, 2003. Initially, BSC was meant for widows only; however, it was decided later by the government to extend the facility to senior citizens aged 60 years and above with effect from January 1, 2004."
The website notes the manipulation of the interest rate on these products as follows: 1st July 2003 the applicable rate was 10.08 percent which was raised to 16.8 percent on 1st December 2008 when the PPP-led coalition government was in power. There was fluctuation in the rate during the intervening years and by 1st July 2012 the rate was 14.64 percent. By 1st July 2013 the rate was 12.24 percent but was raised on 1st January 2014 to 14.04 percent. After the recent levy of 10 percent tax the effective rate declined to 9.36 percent or in other words, it reached a historical low.
The total share of NSS unfunded debt in the government's domestic debt stood at 2.76 trillion rupees or 19 percent as of end March 2017 (as per the Economic Survey 2016-17). With the increased reliance on NSS products as a source of funds for the government, the rate of return on several products has been continuously revised downward to, sceptics argue, reduce the amount payable by the government on the certificates issued. However, the rate manipulation was couched in economic terms in the latest Survey: "the rates on NSS were revised downward three times during the first nine months of current fiscal year to align them with the market rates" - market rates that incidentally were reduced as per the PML-N's strategy to encourage private sector credit. But reducing rates has a downside which is a decline in net mobilization by the National Savings Schemes.
The general public takes decisions on the basis of existing rates and while those employed get an income adjusted for inflation and in addition have time to make provisions for their retirement at a future date yet unfortunately pensioners and widows do not have that luxury and are compelled to take investment decisions based on a rate that is applicable for the long-term. It was precisely these reasons that these two products were launched for a 10-year period with a rate of return higher than applicable on other products.
To conclude, there is a basic unfairness in reducing the rate applicable on those certificates that have not yet matured; it is necessary therefore for all administrations to exempt the tax applicable on those NSS products which were bought at the time of purchase. Only new investors in NSS schemes may be offered a reduced rate.
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