Balance this equation

In what appears to be a deal between the UPA and the Left, the rate hike of the Employees Provident Fund to 9.5 per cent was announced on th...

In what appears to be a deal between the UPA and the Left, the rate hike of the Employees Provident Fund to 9.5 per cent was announced on the same day as the increase in FDI caps in telecom to 74 per cent. If it is a deal, then it points to the bankruptcy of the Left. If they were sincere about opposing the FDI, they would not have accepted the bribe of higher EPF rates for the trade unions to allow FDI caps be raised despite their objections on the grounds of national security.

The UPA government does not come out looking too bad, though. Raising FDI caps has immense signalling value today. It is an important message to the world that has watched with dismay as the Left has blocked one reform after another. If it had not been able to raise FDI limits in telecom, the UPA would have lost face as the increase in FDI limits was the only reformist element of Budget 2004. If, as a result, higher foreign investment does occur, the government will more than make up for the increase in interest subsidy of Rs 700 crore, by higher tax and non-tax revenue collection that will result from higher growth. This would have been a small price to pay.

But the finance minister has to find an answer to the next question. How can the cost of the increase in the interest rate on EPF be reduced? There are two elements of subsidy to the EPF. The first is the subsidy due to paying a higher interest rate on the Special Deposit Scheme. The second element of subsidy is that due to tax exemptions given to the scheme. These elements make the scheme attractive to high-salaried individuals as well. Therefore, even though they are not mandated by law to join the EPF, they do so. As a result only 15 per cent of the subsidy 8212; about Rs 200 crore 8212; goes to the mandatory members of the EPF. In Budget 8217;05 the FM should change the tax treatment of all incremental deposits in EPF. Income should be exempt when deposited in EPO, interest income earned should be exempt and then income tax should be paid when the final withdrawal is made. This tax treatment 8212; Exempt Exempt Tax 8212; would make EPF less attractive to the rich. EPF would attract less additional deposits. Consequently, the total amount of subsidy would be reduced over time and the constituency of the Left, which comprises of the mandatory members, would not be hurt. The 8220;grandfathering8221;, or treatment of new deposits as EET while the present ones remain tax exempt, will allow the interests of the present account holders to be maintained. This tax reform will also put the EPF at a par with the tax treatment of savings under the new pension system which conforms to the EET regime.