TAX ON EPF WITHDRAWAL
The 2016-17 budget proposal to tax 60% of withdrawal from EPF (employees provident fund) and other superannuation funds faced flak from all quarters forcing Finance Minister Arun Jaitley to withdraw it lock stock and barrel.
How could the Narendra Modi government, which is committed to the welfare of every section of the society, contemplate such a move in the very first place? Was it really targeted against the salaried class? Was it a right step but not properly piloted?
Jaitley had proposed tax on 60% of withdrawal from accumulations in EPF account (contributions plus interest accrued) from April 1, 2016. However, the money would be exempt from tax if re-invested in purchase of annuity plan. He described the move as a step towards achieving a “pensioned society.”
This concept is driven by a compelling necessity to secure a regular income stream to take care of a person’s decent living after retirement. This would be possible only if he keeps his savings invested in a corpus to fetch the desired return. For a salaried person, money in the EPF is a potent source.
Our law makers had contemplated EPF in the nature of forced saving for old age as left to himself, a person might not save at all and end up using salary entirely on consumption. This logic cannot be thrown to the winds at retirement time. If at that stage, there is no deterrent against withdrawal, there is every possibility that money is consumed at one go say, on marriage or any other social ceremony.
While, mooting the tax, Jaitley’s intent was to discourage this tendency. He wanted persons to stay invested for a good portion of the corpus (read 60%). A related objective was to help an ecosystem for garnering long-term resources for investment in infrastructure projects so crucial for development and nation building. There was another pressing consideration.
Under new pension scheme (NPS) –applicable to government employees who joined service after January 1, 2004 (opened later to voluntary subscribers) – all accumulations on withdrawal are taxable unless these are re-invested in annuities. This created an anomaly versus EPF. By proposing tax only on 60% of withdrawals under NPS, Jaitley brought both the dispensations at par.
It is ironical that critics did not appreciate the spirit behind the proposals and were merely obsessed with a myopic stance that the government had no business taxing hard earned savings of an individual and that he should
have full freedom to utilise these in a manner he deems fit.
On the face of it, the argument may look appealing. Flush with funds, one may even be tempted to use the entire corpus on performing marriage function or a social ceremony. If, someone can afford such extravaganza, then, he can as well pay tax! On the other hand, if his sole interest is in safeguarding his future [in sync with intent of law] then, he will stay invested and won’t have to pay tax.
An individual cannot do cherry picking as per his convenience. Having enjoyed exemption – on both contribution and interest accrued all through – all in the name of ensuring security in old age, it would be unfair and untenable for him to lay claim on accumulations without paying tax. Yet, if freedom to use money is all that matters then, why even have a law on EPF. Then, let employees take their own decisions on whether to put money in savings or fritter entire income in consumption.
If, people genuinely believe that EPF (or investment in NPS) is a sine qua non of security in old age (that is the way it should be) then, this concept should be observed in true spirit till the last moment. That in turn will require that the person stays invested and Jaitley’s proposal incentivises them to just do that.
‘Pensioned society’
Some analysts have argued that government should give employees the option of withdrawing a fixed amount from the corpus each year. How does it differ from letting them withdraw the corpus at one go (on retirement)? This too militates against the basic concept of “pensioned society,” only difference being that here, the dilution is happening in a staggered manner.
Ironically, the heart of the proposal was submerged in euphoria over “Modi – government is levying a tax on hard-earned saving of salaried class”. That tax won’t be levied if one stays invested was glossed over. Even the fact that those earning less than Rs 15,000 per month (they are 85% of the total) were not covered under the proposed dispensation was also ignored.
Even while dumping EPF proposal, Jaitley has retained the one granting exemption on 40% of withdrawals from NPS. Although subscribers under NPS have reason to feel relieved yet, discrimination vis-a-vis those under EPF persists. Eventually, the government will have to take the next logical step of exempting entire NPS withdrawals to ensure parity.
In a nutshell, the pull back from a well crafted step is not a good omen. It will tantamount to the state abdicating its responsibility in creating an ecosystem wherein people are fully protected in their old age. It will also be a huge setback to the government’s efforts in garnering long-term resources for building roads, bridges, highways, ports, rails etc which are badly needed to catapult Indian economy to a double digit growth path.
In the overriding long term interest of employees, the government should make efforts to resurrect the proposal but only after creating full awareness about its merits. There is also an urgent need for a vibrant annuities market (this hinges on developing a functional market for bonds – both government and corporate) which will help generate good return. Modi must not get cowed down by any pressure group in to shelving any move that benefits the society at large.
(The writer is a New Delhi-based policy analyst)
http://www.deccanherald.com/content/537267/good-move-hasty-retreat.html