Dear Shri Arun Jaitley, On 29 February 2016, your quiet announcement in the budget speech---
60% of Provident Fund (PF) withdrawals would be taxed---brought considerable disquiet among the salaried class and the commentariat which together with trade unions launched a virulent attack on the proposal. It threw the official machinery pell-mell with conflicting reports emanating from it with a view to placating the middle class salaried people but none of it jelled.
With the result, it was decided at the highest level that the proposal stood withdrawn. The salaried class heaved a collective and huge sigh of relief. Why was there such a virulent backlash? The answer is India unlike the western world doesn’t have too many retirement benefits or social security net post retirement, and to grudge the salaried class’ only raincheck was a folly.
But then your government had committed another financial gaffe as early as on 10 February 2016----employer’s contribution accumulations and interest thereon must stay invested till retirement i.e. the age of 58 years, period, even if one was out of employment out of choice or otherwise much earlier. In other words, if a youngster hangs up his employment boots at the age of 35, having started in employment career at the age of 25, he will get his own contribution accumulations or employee’s contribution plus interest thereon. As it is full withdrawal is permissible if one makes an application after 60 days of unemployment.
The youngster in this example might have started his own business or practice and might have looked forward to the full withdrawal. But the new rule, which incidentally has been kept in abeyance till 30 April 2016, pours cold water on his financing plan as indeed on every other person eyeing his full PF money may be for marrying his/her daughter etc. A few exceptions have of course been in favor of females quitting to get married or to deliver a child etc. but by and large the salaried class is in for disappointment. BTW, there is a unisex escape route---foreign employment that could throw up a lot of wannabe foreign employment seekers, both genuine and impostors!!
Why was this done? The lofty explanation offered was to prevent people from drying up their PF accounts, and to leave something for the family’s post retirement life. This concern for family welfare sounds hollow in the face of grim realities. First, bank loans in India are
expensive and not forthcoming for filial events like wedding. In the event, the move might have an unintended opposite effect---the salaried class falling prey to loan sharks. Second, it is not the business of the government to micromanage a family’s capital budget. Thirdly, why should the government unnecessarily court financial trouble by paying attractive interest on balance in PF account of those who had quit employment long ago?
Of course, the extant liberal regime---full withdrawal has been misused---by pretending 60 day unemployment many times in one’s life. The government ought to respond but not the way it has. Carrot and stick policy is what management gurus recommend for such situations. Punish the charlatans by shutting the benefit of this retirement benefit or impose a hefty fine of say Rs 10,000 for those seeking reentry. This is eminently possible in the milieu of Universal Access Number (UAN) which has been working very well like Permanent Account Number (PAN) in the tax context.
UAN with its emphasis on identification can tell the pretenders from the genuine new entrants to the PF scheme. And those who stay put till 58 may get a small but significant financial reward. But then what the heck, why should the government lose sleep over this liberty being taken by those quitting employment and seeking reemployment after the mandatory cooling off period of 60 days with an eye on full withdrawal? After all, they are not committing any bank robbery or loan default like Vijay Mallya. Come on, it is their own money at the end of the day. Withdraw this obnoxious new rule forthwith. It would be a sort of encore, soon after the rollback of the tax proposal though this is a non-tax proposal.