Jaitley Hints at Softening Stance on Proposal to Tax Provident Fund Withdrawals

New Delhi: Coming under scathing criticism for proposing a 60% tax on withdrawals from the Employees Provident Fund (EPF), Finance Minister Arun Jaitley on Wednesday reluctantly agreed to convey the final decision on the matter during his reply to the debate on the Budget in parliament.

Although Jaitley sought to put on a brave front in the wake of jibes from the opposition, media and workers, his defence appeared weak. After all, Jaitley chose to tax savings while keeping profits on investments in the stock market tax free, provided the investments were a year old.

There had been an immediate and sharp reaction to the proposed tax. Several political parties and trade unions had criticised it, some even terming it “double taxation” on the ground that EPF contributions were not exempt from being taxed beyond the 80C ceiling of 1.5 lakh rupees per annum.

A K Padmanabhan, the president of the Centre of Indian Trade Unions and a member Central Board of Trustees (CBT) of the Employees Provident Fund Organisation (EPFO), criticised the move on the grounds that it sought make EPF less attractive in comparison to the National Pension Scheme (NPS). He was quoted as saying, “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?”

A strong opponent of the move, Virjesh Upadhyay of the RSS-affiliated Bharatiya Mazdoor Sangh and a CBT member, had earlier told The Wire that the proposed tax amounted to double taxation. A delegation of union leaders would take up the matter with Prime Minister Narendra Modi and Jaitley, according to Upadhyay, who also said the proposal to tax EPF withdrawals had also not been mentioned in the meeting of the CBT.

In his defence on the proposal, Jaitley said almost 3 crore of the 3.7 crore members of the EPFO, who earned 15,000 rupees and below in statutory wages would not be impacted by the move. “It is only those private sector employees who have just joined who will be impacted,” he said.

Jaitley also claimed that the principal intention was not to increase revenue through the taxation proposal but to move towards making India a society in which more people had a pension to fall back on in old age. That is why, he said, the provision exempted 40% of the withdrawal from tax and provided exemption on even the remaining 60% withdrawal provided the money was invested in pension-based annuities.

“This was intended to incentivise people in the private sector also to use it as a kind of pension fund and to disincentive those who otherwise would indulge in consumption of that fund this move was made,” he said.

Many people who retire face a cash crunch soon after as large chunks of the lump sum money received from their EPF goes into meeting social commitments, the Economic Survey 2015-16 had also pointed to another aspect. It cited a market survey in which 70% of the workers said they would prefer to receive cash instead of contributing a part of their salary towards the EPF. The Survey noted that these employees were facing a liquidity crunch, but what went unsaid was that many had also taken loans to meet various needs at interest rates far higher than the EPF rate.

The government is expecting that similar tax treatment for the EPF and NPS would encourage people to invest in the latter, especially since the provision of EPF withdrawals had also been made more stringent in early February. But critics of the move say it actually reduces the returns on the EPF, which remains the most popular mode of saving for the working class.

It is also being suggested that the Employees Pension Scheme, which is part of the EPF, be strengthened with the removal of the 4,000 rupees per month cap on the disbursals so that a greater number of employees may opt for it.