The proposal mooted by finance minister, Arun Jaitely in the Union Budget for 2016-17 to tax 60% of withdrawal from EPF [employees provident fund] and other superannuation funds has caused Modi – government much embarrassment. It faced flak from all quarters including from its own support base forcing Jaitely to withdraw the decision lock stock and barrel.
The budget announcement was bandied as anti-salaried class/ common man by all and sundry. But, that is completely out of sync with the DNA of prime minister who – from the day of assuming charge – has consistently vowed to devote every moment of his work to improving the welfare of the 1.25 billion people especially the poor and down-trodden.
How could his government take recourse to such a measure? Was it really targeted against the salaried class? Was it a right step but not properly piloted?
Jaitely had proposed tax on 60% of withdrawal from accumulations in EPF account [contribution plus interest accrued] from April 1, 2016. However, the money would be exempt from tax if re-invested in purchase of annuity plan. It was aimed at moving people towards what Jaitely described as a “pensioned society”.
This idea is driven by a compelling necessity to secure a regular income stream that is adequate to take care of a person’s bare minimum expenses for a decent living post-retirement. In contemporaneous times when the life expectancy is high, this becomes all the more crucial as he has to necessarily live 20-30 years after he retires [taking 60 years as benchmark].
This would be possible only if he keeps his savings appropriately 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 this as a forced saving for old age as left to themselves, normally persons would spend their entire salary on consumption. It is a welfare measure mandated by legislation.
Now, if a person has saved all his working life time for the sake of a decent living even when he is physically and mentally no so well equipped then, the same logic requires that those cumulative savings are preserved for a regular income stream. The purpose will get defeated if the money is withdrawn and consumed at one go say, for performing marriage or any other social ceremony.
So, when Jaitely came up with the proposal, his overarching objective was to discourage this tendency. He wanted persons to stay invested for a good portion of the accumulated amount [read 60%]. A related objective [though not stated explicitly] was to help an ecosystem for garnering long-term sources for funding investment in infrastructure projects so crucial for development and nation building. There was another pressing consideration.
Under the 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 annuity plans. But, this created an anomalous situation vis-a-vis EPF where all withdrawals were exempt from tax. How can subscribers under NPS be treated differently from those covered under EPF?
Through the budget proposals, Jaitely sought to address this anomaly. Thus, even while taxing 60% of withdrawals under EPF, he mooted exemption on 40% of withdrawals under NPS. This way, both the dispensations were brought at par.
Despite the proposals being flawless and strictly in conformity with people’s welfare, critics reacted strongly based on a myopic stance that the government had no business taxing their hard earned savings and that they should have full freedom to utilize these as per their wish. Moreover, when investment in annuities yielded poor return why should they be forced in to such plans?
On the face of it, the argument may look appealing. Who would not like to have the flexibility to manage the funds? No wonder, some of them may wish to use the entire corpus on performing marriage function or a social ceremony. If, someone can afford it, then, he can as well pay tax on the withdrawal. On the other hand, if his sole interest is in safeguarding his future then, he will stay invested and won’t have to pay tax.
Granting a person full freedom to use the corpus will tantamount to questioning the very raison de atre behind a law on EPF. In that case, why should the government even ask him [and his employer] to ‘compulsorily’ contribute a portion of his salary to EPF. Then, the law should be scrapped and employees may take their own decisions on whether to put the money in savings [albeit for future security] or fritter entire income in consumption.
On the other hand, if people genuinely believe that EPF [or investment in NPS] is a sine qua non of future 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 Jaitely’s proposal incentivizes them to just do that. Low return on annuities is too weak an argument against this overriding necessity.
Some of us argue that the government should give them the option of withdrawing a fixed amount from the corpus each year. How does it differ from letting them withdraw the amount at one go [on retirement]? This too militates against the basic concept [read ensuring old-age security], only difference being that here the dilution is happening in a staggered manner.
Ironically, the heart of the proposal was submerged in the euphoria over a very ‘selective’ and ‘isolated’ focus on ‘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 any way not covered under the proposed dispensation was also ignored.
Even while dumping EPF proposal, Jaitely has retained the one granting exemption on 40% of withdrawals from NPS. Although, subscribers under NPS have reason to feel relieved yet, discrimination of employees under it vis-a-vis EPF persists. Eventually, government will have to take 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 whereby people are fully protected in their old age. It will also be a huge setback to government’s efforts in garnering long-term resources for building roads, bridges, highways, ports, rails etc which indeed poses a big challenge.
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] which will help generate good return thereby allaying their concern on this score.
Modi must not get cowed down by any pressure group in to shelving any move that benefits the society at large.