As feared, the government has succumbed to the pressure from the organised labour sector and rolled back the budget proposal to tax a part of the employee’s provident fund on withdrawal. The proposal was not aimed at revenue-generation. No. It was meant to create a level playing- field between the EPF and the better, and publicly open, National Pension System. The latter has not taken off due to the preferred tax treatment given to the EPF.
Finance Minister Arun Jaitley proposed to tax 60 percent of the EPF corpus at the time of withdrawal if the same was not invested in a pension product such as an annuity. The prevailing EPF scheme followed the three `E’s, that is, tax exemption on contributions, interest and withdrawal. Jaitley proposed to make it `E-E-T’, that is, exemption on contributions and interest but 60 percent withdrawal taxable should it not be reinvested in designated annuity schemes. Since the original scheme was meant to benefit low-income salaried employees drawing wages of less than Rs. 15,000 per month, the three Es made immense sense.
New Delhi: In the face of all round attack, Finance Minister Arun Jaitley today completely rolled back the controversial proposal to tax the employees’ provident fund (EPF) at the time of withdrawal.
However, over a period of time even those drawing emoluments several times more than Rs 15,000 a month had joined the EPF scheme. As a result, the NPS continued to lag far behind. As the finance minister said in the Budget speech, the objective was to encourage the creation of a ‘pensioned society.’ Given the woefully small percentage of Indians who subscribe to any retirement plan even among the working population, any proposal which sought to incentivise subscriptions to the NPS ought to have been welcome.
But it was not, it turned out. Leaders of the employees’ unions, including those affiliated to the ruling party, immediately let out a scream, seeking the withdrawal of the tax proposal on a proportion of the provident fund on withdrawal. BJP members too joined the chorus. Of course, the Opposition leaders were quick to call the proposal anti-people. The finance minister felt cornered. At the root of his troubles was the basic truth in all tax matters: a privilege once given, however justified or unjustified it may be, is hard to withdraw. Nobody wants to let go of a gain even if unfairly granted originally.
When Prime Minister Modi himself publicly stated that he would ask his finance minister to reconsider the proposal, it was plain that the latter would have to roll back the proposal. This he did in the Lok Sabha on Wednesday. Remarkably, the government was amiss in not adequately explaining to the people that the proposal, which since stands withdrawn, was to apply prospectively from April 1, 2016. All contributions and withdrawals from the EPF scheme made before the end of the current financial year were not to be effected by the said proposal. It was to apply only to those contributions which were to be made after April 1,2016.
In other words, withdrawals of funds in the EPF account on 31 March 2016 were not to be covered by the 60 percent tax proposal. Had this been explained to the people, there was good chance that the resistance of the employees would not have been as strong as it turned out to be. The failure of the government on this score allowed the Opposition leaders to spread a lot of misinformation. Besides, the proposed tax on 60 percent of the withdrawn amount from the EPF scheme was to apply only to those earning more than Rs. 15,000 a month.
In short, those who need not be cosseted by tax exemptions and need to pay their share towards the task of nation-building. However, the salaried class as a whole constitutes a powerful pressure group unlike, say, the landless labourers or unskilled daily wagers, and no government finds it easy to ignore their voice. A strong government with a sound majority in Parliament has had to beat retreat before the shrill public and private sector salariat. Sound economic sense beaten by populist pressure. Regrettable.