On February 29, in the Union budget, Finance Minister Arun Jaitley proposed to tax withdrawal of 60 per cent of accumulations in the Employees’ Provident Fund (EPF) after April 1, 2016. He also announced a monetary limit for the contribution of employers to the provident and superannuation fund of Rs 1.5 lakh for taking tax benefit. On March 8, both proposals were dropped. This rollback raises questions about policy credibility. Beyond the merits and demerits of taxing EPF, it shows a lack of due diligence in preparing the tax proposal in the first place — it was not brought up or circulated in any of the meetings of the Central Board of Trustees of the Employees’ Provident Fund Organisation, for instance. There was a failure to make the case for, or communicate the merits of, such taxation. Not surprisingly, the move drew all-round criticism from stakeholders.
There are valid reasons for such a tax. For one, the proposed tax would have equalised the treatment of the EPF and the National Pension System (NPS). Currently, the EPF is favourably positioned as it is fully exempt from taxation while the NPS attracts taxation at the time of withdrawal, even though the budget has provided it with a 40 per cent exemption. Two, notwithstanding the criticism of the tax move,
the truth is that about 83 per cent of EPF subscribers would not have been affected.
Some aspects of the tax move were unjustified. For example, the government clarified, after the budget, that the tax exemption would continue to apply to even the 60 per cent if the money withdrawn is re-invested in annuity schemes. This smacked of financial paternalism as it curtailed the choices for an individual with regard to retirement savings.
How does the rollback now impact the broader idea of creating a pensioned society and improving the attractiveness of the NPS — the two stated goals of the budget proposal? “In view of representations received, the government would like to do a comprehensive review of this proposal,” the FM said in the Lok Sabha. But it is unlikely that the government will re-implement another version of this tax in a hurry, primarily because it is now seen as politically toxic. The FM must not lose the moment to reform the overall pensions regime in the country. This time, the government should make more space for a dialogue with stakeholders and build a consensus before rushing to introduce a proposal.