A day after Finance Minister Arun Jaitley’s Budget proposal that 60 per cent of withdrawal on contribution to the employee provident fund (PF) made after April 1 this year will be subject to tax triggered heated discussions inside and outside Parliament, the Finance Ministry said Tuesday it is considering “various demands” on the issue, including levying tax only on accumulated returns on the corpus and not on the contributed amount.
Revenue Secretary Hasmukh Adhia said the Finance Minister would be considering all these suggestions and will take a view in “due course”.
The proposal drew angry responses. A K Padmanabhan, board member of the Employees’ Provident Fund Organisation or EPFO’s Central Board of Trustees (CBT) and president of CITU, said: “Beyond a nominal lock-in of just 12 months, the government is willing to completely exempt from tax an investment by a person in the equity markets. But it now wants to tax life-long savings of a worker, accrued from tax-paid income, even after a lock-in of 25 years. How logical is that?”
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Padmanabhan said the move to impose tax on EPF withdrawals comes as part of concerted attempts by the government to disincentivise investments in EPF against alternatives such as the National Pension System, which are more liberal in routing the corpus to stock markets.
The Central Board of Trustees of the EPFO selects fund managers of the EPFO, which manages a total portfolio of around Rs 6.5 lakh crore (under the PF and pension schemes).
Three other CBT board members told The Indian Express that the plan to impose a levy on EPF withdrawal was not brought up or circulated at any of the past meeting of the central board.
Virjesh Upadhyay, another CBT board member and national secretary of the BJP-affiliated Bharatiya Mazdoor Sangh, said the proposed levy is akin to a “double tax” on savings of workers, and did not qualify as tax on income.
“We will take it up with the government and will be meeting the Finance Minister and the Prime Minister on this,” Upadhyay told The Indian Express.
Raman Pandey, another CBT member on the EPFO board, and president of INTUC, said the issue was never brought up in CBT meetings. “The EPFO Trust is an autonomous body and the government has no right to take a unilateral action on issues such as the new tax. We will vehemently oppose this until it’s withdrawn in full,” he said.
A query sent to the Labour Secretary Tuesday evening on whether the proposal was forwarded by his Ministry went unanswered.
Revenue Secretary Adhia said, “We have received representations today from various sections suggesting that if the amount of 60 per cent of corpus is not invested in the annuity products, the tax should be levied only on accumulated returns on the corpus and not on the contributed amount. We have also received representations asking for not having any monetary limit on the employer contribution under EPF, because such a limit is not there in NPS. The Finance Minister would be considering all these suggestions and taking a view on it in due course.”
A CBT board member said the trend of diluting the primacy of EPF as a default instrument for channelising savings of the organised sector workforce started with the last Budget. In his speech, Jaitley had pointed to the surge in “dormant” EPF accounts forcing a conclusion “that both EPF and ESI have hostages, rather than clients. Further, the low paid worker suffers deductions greater than the better paid workers, in percentage terms”.
Citing this, Jaitley had said that with respect to EPF, employees needed to be provided two options — having an option for EPF or the New Pension Scheme (NPS) and those below a certain threshold of monthly income, having an option to contribute to the EPF, without affecting or reducing the employer’s contribution.
The Economic Survey for 2015-16 corroborated the need to move in this direction and specifically cited a market survey conducted via phone with associates of one of India’s largest contract labour companies, where workers were asked whether, if given the choice, they would prefer to continue contributing part of their salary into their EPF account or receive the same amount in cash instead.
“About 70 per cent of respondents said they would prefer to receive cash. This 30 per cent approval rating could signify that a large portion of workers are liquidity constrained — or it could suggest that the functioning of the EPF can be further improved,” the Survey noted.