Double whammy

Widespread opposition to the proposal to tax withdrawals from Employees’ Provident Fund puts the government on the back foot.

Published : Mar 16, 2016 12:30 IST

A Congress protest demanding the rollback of the tax on EPF withdrawals, in Delhi on March 7. In the face of mounting pressure, Prime Minister Modi himself put out feelers to the Finance Minister to reconsider the proposal.

A Congress protest demanding the rollback of the tax on EPF withdrawals, in Delhi on March 7. In the face of mounting pressure, Prime Minister Modi himself put out feelers to the Finance Minister to reconsider the proposal.

In a major departure from previous Budget presentations, Union Finance Minister Arun Jaitley proposed to tax 60 per cent of withdrawals from the Employees’ Provident Fund (EPF) after April 1. Any exemption was contingent on the subscriber reinvesting the amount in a pension product like an annuity scheme (a form of an investment or insurance entitling the investor to an annual sum of money each year). All Provident Fund schemes have hitherto enjoyed the EEE, or Exempt-Exempt-Exempt, tax status (no tax on contribution, interest or withdrawal) unlike the National Pension Scheme (NPS), which is an EET, or Exempt-Exempt-Tax, scheme. But pressure from various quarters forced the government to roll back the proposal in less than a fortnight.

The resistance to the proposal came not just from trade unions, including the Bharatiya Mazdoor Sangh, an affiliate of the Rashtriya Swayamsewak Sangh, but from a large section of the salaried middle class, which is considered a core constituency of the Bharatiya Janata Party in electoral terms. All the negative publicity, especially the outrage on social media, left the government with little option but to roll back its proposal on March 8. In fact, supporters of the government were of the opinion that the proposal had taken the sheen out of the otherwise very progressive Budget with its emphasis on agriculture, rural India and infrastructure. With a mounting chorus of opposition, Prime Minister Narendra Modi himself put out feelers to the Finance Minister to reconsider the proposal.

Explanatory note

On March 1, the day after the presentation of the Budget, the Finance Ministry issued an 11-point explanatory note in order to give clarity on the reasons for the taxation. It said the purpose for making the change in the tax regime was to encourage private sector employees to go in for pension security after retirement instead of withdrawing the entire money from their Provident Fund accounts. Towards this, 40 per cent of the total corpus withdrawn would be tax exempt both under EPF and the NPS. It was expected, the note said, that the employees of private companies would place the remaining 60 per cent of the corpus in annuity out of which they would get a regular pension. EPF subscribers were assured that they would not be taxed if that money was invested in annuity schemes.

It was also proposed that if a person died, the annuity in the corpus would not be taxed, thus benefiting the heir. “The idea behind this mechanism is to encourage people to invest in pension products rather than withdraw and use the entire corpus after retirement,” explained the note.

This apparently left EPF subscribers with little option to spend or invest their money wherever they deemed fit; in a way they were compelled to reinvest in annuity. For the salaried middle class, this naturally came as a big blow as it was normal to withdraw EPF deposits on occasions warranting major expenditure like buying a home, marriage of children, or medical treatment.

The government also clarified that small-salaried employees earning up to Rs.15,000 a month would be exempted from the taxation on EPF. It was argued that of the 3.7 crore EPF subscribers, three crore came within the statutory wage limit of Rs.15,000 a month and that the scheme was designed to encourage the 60 lakh contributing members who were highly paid employees of private sector companies to opt for pension security.

‘Double taxation’

A.K. Padmanabhan, president of the Centre of Indian Trade Unions (CITU), said that the government’s proposals were aimed at putting the savings in the NPS and the EPF on par. To that extent, the government would exempt 40 per cent of the NPS accumulations as against the tax on 100 per cent of the amount at present and this exemption would be extended to EPF too, which was not taxed until now. “There is a concerted move to push the savings of workers and employees in social security schemes like Employees’ State Insurance [ESI] and the EPF into the market. It is a kind of double taxation. A section of the EPF subscribers are already in the tax net,” he said.

“In the Budget speech last year, the Finance Minister made a reference that both the EPF and the ESI had hostage clients. It was suggested that an option should be given to EPF subscribers to switch over to the NPS, which is a market-linked pension scheme, and for ESI subscribers an option to switch over to mediclaim policies. Despite the opposition from trade unions, the government forced 5 to 15 per cent of EPF funds to be invested in the stock market. Since the 1950s, both the ESI and the EPF have been internationally hailed for being the largest social security schemes in the world, and successive governments have taken credit for that,” Padmanabhan told Frontline . He said that it was quite possible that the tax would reappear in another form despite the government putting on hold its tax proposal on the EPF.

On March 11, 2015, at the 206th meeting of the Central Board of Trustees (CBT), EPF, Padmanabhan had raised strong objections to the word “hostage” used by the Finance Minister in his Budget speech that year. In paragraph 42 of the speech, Jaitely made a proposal in the Finance Bill for the appropriation of Rs.6,000 crore lying in the EPF corpus to create a “Senior Citizen Welfare Fund”. Padmanabhan said that the money lying in the inoperative account head in the EPFO corpus was the hard-earned savings of the workers who had not withdrawn it until then and that the suggestion was a move to shut down the Employees’ Provident Fund Organisation once and for all. In fact, trade union representatives at the meeting expressed surprise that the matter had not been discussed at the level of the Labour Ministry and the specific proposals on the EPF were not discussed at the meeting of the CBT. They opposed it.

All central trade unions had objected to the new pension scheme as well. According to the minutes of the meeting, a copy of which is available with Frontline , BMS secretary Prabhakar J. Banasure, one of the board members, said that the Finance Ministry had no authority to dictate terms to the CBT, which was mandated to administer the fund under the provisions of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952. He said the provisions of the Act could not be overruled by the Finance Minister’s speech as it was a piece of welfare legislation enacted by Parliament. Others pointed out that this would result in employers compelling the workers to submit undertakings to opt out of the EPF, failing which they would be denied employment.

Interestingly, the government proposal drew support from the employer representatives. They supported the Finance Minister’s usage of the term “hostage” to explain the funds in the EPF corpus. Ravi Wig, chairman of the Council of Indian Employers, said the word “hostage” used by the Finance Minister was appropriate. Finally, because of stiff opposition, the government could not take out the Rs.6,000 crore from the corpus to create the Senior Citizen Welfare Fund.

The irony is that since 1995, 8.33 per cent of the employers’ contribution from the EPF has been going to the pension scheme. EPF, it is argued, hardly makes any money to beat inflation. As it is invested in government securities, the returns, though not much, are guaranteed. It is said that the value of the money the subscriber will have at the time of retirement will roughly have the same purchasing power it has at the time of saving. With taxation, the returns will be negligible. The moot question is whether the government has the moral right to interfere with the hard-earned savings of employees in this manner rather than let them decide on their life’s priorities.

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