Relief for EPF holders. Perceptions do matter
The Union Government's decision to roll back a Budget proposal to tax 60 per cent of the Employees’ Provident Fund amount has come after reservations from various quarters that the proposal would impact the savings of salaried individuals. There had been an across-the-board belief that the Government could be seen as anti-people if it went ahead with the proposal. While this may not have been an accurate assessment, perceptions matter and the Government could not have ignored this reality. Now that Union Minister for Finance Arun Jaitley has announced a reversal, retaining the tax-free status of the entire EPF amount, many political parties have jumped into the arena, claiming credit for having ‘pressured' the Government in the ‘public interest', especially with Assembly elections round the corner in four States and a Union Territory.
In particular, Congress vice president and Member of Parliament, Mr Rahul Gandhi, has been flaunting his ‘achievement' in forcing the Government's hand. But then, as Mr Jaitley has pointed out, if Mr Gandhi is so keen to take credit, he should persuade his party to help the Government pass the Goods and Services Tax Bill, whose impact will be of far greater good to the nation's economy and the people. The Congress leader can then corner all the glory for himself and his party. Unfortunately, the Congress has adopted an obstinate position on the issue, from which it shows no indication of shifting. That said, speaking rationally, it would be misleading to say that the proposal in the 2016-17 Budget to tax 60 per cent of the EPF corpus, was flawed. It was a bold move and, given that it was bound to raise political hackles, could not have come without solid reasons.
First, the tax on EPF would have been a leveller with the National Pension System. The NPS attracts taxes at the time of withdrawal (with the Budget offering an exemption of up to 40 per cent). Therefore, if pensions can be taxed at withdrawal stage, why shouldn't have been EPF (again, with some exemption)IJ Second, the tax on EPF would have affected barely over 15 per cent of EPF holders, given the exemptions etc, thus busting the popular myth that it would adversely impact EPF holders on a massive scale. Third, even if the EPF beneficiaries withdrew 60 per cent of the amount, they would still have got tax benefits if the sum was invested in annuity schemes. This was as fair as it could have got. Yet, not surprisingly, these issues never came to be highlighted by the detractors of the Government's move. They had either not carefully read the proposal or deliberately cherry-picked for political convenience.
Now that the proposal has been rolled back, the question of reforming the pension and provident fund areas assumes greater importance. With the proposed level-playing field now gone following the reversal of the earlier decision, it remains to be seen what the Government does to offer a retiring citizen in terms of attractive options. Ideally, he or she should be able to make a considered choice between a pension fund and an employee provident fund, wherever possible. That is now difficult to do, because the first is taxable and the second, non-taxable. This is not a good incentive for pension fund seekers.