Union Budget 2016: Why Modi Government is Wrong in Taxing EPF

March 2, 2016 Author: Rajesh Mishra

NEW DELHI: The Union Budget 2016 is clearly a hammer on the already burdened middle class. The Achhe Din which had been promised on Sabka Saath and Sabka Vikas seems to be in altogether doldrums as the Centre has adopted a very dangerous populist measure that's going to badly harm the crisis-ridden economy.

Currently, there is huge debate going on whether government's decision to tax EPF is right or wrong. While some experts are backing the move, some are calling it completely wrong.

Government is Grossly Mistaken

The Modi government would be better off to withdraw the decision to tax withdrawals from the Employees' Provident Fund (EPF) and be content with starting a wide-ranging debate on the subject.

The right way to tax savings is to exempt them at the time of contribution, exempt them at the time of accumulation and tax them at the time of withdrawal. Withdrawal would refer to that part of the matured saving which is not ploughed back into another saving product. The Centre might think it is precisely such a rational tax treatment it is bringing to bear on EPF, but it is grossly mistaken.

Taxation Must be Equitable

Taxation is ought to be equitable. When rich traders as well as professionals get away without paying tax and the tax base remains constricted, squeezing the salaried employee ever more to raise additional revenue is the opposite of equitable.

The exempt-exempt-tax (EET) regime can be palatable only when the tax base is wide, the rate of tax is significantly lower than what it is today and the highest marginal rate kicks in only at an appreciably higher income threshold.

Then again, the insistence that 60% of retirement savings would qualify to be tax-exempt only if invested in annuities has no rational basis. It could well be that the retiree is better off investing the money in, say, a house or a shop that would offer a steady return and also, more importantly, from the point of view of Indian tradition, allow his family to draw immediate benefit from the retirement saving of the family elder.

Must Act As Per Broader Understanding of the Subject 

A new tax regime for retirement savings should kick in for those who are beginning to save for their retirement and have the option of planning their savings in the knowledge that a portion of their retirement corpus could be taxed. This is what was done for those who joined the National Pension System (NPS). The government must start a discussion on how to achieve tax parity for EPF and NPS members. And, act later, as per a broader understanding of the subject. Otherwise, it would find itself in a deep trouble.


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