Amnesty for evaders, burden for salaried: Why EPF tax must be scrapped

Dinesh Unnikrishnan March 02, 2016 14:59:31 IST
Amnesty for evaders, burden for salaried: Why EPF tax must be scrapped

It wasn’t long ago when veteran industrialist Ratan Tata spoke about the government’s interference in people’s lives when he was addressing a group of students in Chennai. “...They (the government) should have no role in telling people what to do”. Though the industrialist said this in a totally different context, Tata’s comments should prompt Finance minister Arun Jaitley to rethink, as he has proposed to tax the retirement corpus of millions of salaried people.

Amnesty for evaders burden for salaried Why EPF tax must be scrapped

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Jaitley’s budget proposal to tax 60 percent of a retiree’s EPF savings, if not invested in annuity, is a poorly-thought out move since no one would want the government to tax a good part of their life’s savings (for many of them EPF is the only savings). For Modi himself, this is politically disastrous move as many states are set to enter the election phase in a few months, and also in the backdrop of growing skepticism on this government for well known reasons such as growing intolerance, slowing economy and stagnant reforms.

The reason for the public uproar on the proposal to tax 60 percent of the EPF corpus is understandable. The government is effectively moving from EEE regime (exempt, exempt exempt), to EET (exempt, exempt, tax). There is also a proposal to tax employer contribution, in which case it becomes a double tax or TET (tax, exempt, tax).

The government’s rationale to bring 60 percent of EPF corpus under tax net was to bring it on par with NPS and encourage (rather forcing) salaried class to maintain a corpus for retirement by investing part of it in annuity schemes.

The government’s intention is good for sure but may not work for all since the financial needs of retirees are different.

Many reserve their EPF funds to either buy a retirement home or get their children married. When the government forces them to reinvest part of this amount, else pay heavy taxes, they will have one question. How can the government decide what one should do with their retirement corpus? It is up to the individual to choose to spend or reinvest his life savings. Also, there aren’t many annuity schemes to choose from and give attractive returns to the investor.

“The salaried class is a soft target to impose tax. It is an extremely harsh move on the salaried segment, especially the small salaried segment,” said Riaz Thingna, Director (direct and indirect tax) at Grant Thornton Advisory Private Ltd.

The confusion within the government on the EPF tax proposals was evident on Tuesday, a day after Jaitley launched the shocker in the budget announcement, when confusing explanations came from revenue Secretary Hasmukh Adhia (who said only interest accrued on 60% of the contributions to the EPF will be taxed while the principal amount will remain tax exempt) and Jayant Sinha, Union Minister of State for Finance (who tweeted out a clarification that said 60% of the corpus will also be taxed if not invested in annuity).

Prima facie, it appears that the proposal is to tax the whole corpus (both the principal and the accrued interest). If that is the case it can be politically disastrous move for the Modi government.

According to a calculation by Indian Express, an employee who is drawing a salary of Rs 1 lakh will have to pay tax on Rs 38.7 lakhs out of the total accumulated corpus of Rs 64.6 lakhs, after, say 30 years of working period. That would mean a significant component of his corpus will return to the government coffers if he refuses to reinvest the amount in annuity schemes. There is no fairness in this proposal. What if the employee wants to use that money to buy a retirement home?

The big irony is that on the other hand, Jaitley is proposing to offer an amnesty-like window to the blackmoney holders to come clean of their ill-gotten wealth by paying 45 percent tax. In other words, the honest taxpayer is burdened with higher tax outgo on his life’s savings while the crooks are given a golden chance to legalise their ill-gotten wealth. One can’t blame the taxpayer if he feels anger towards the government.

Clearly, the government doesn’t have a strong case to go ahead with the proposal here. It should immediately scrap the plan. Jaitley’s budget 2016 has indeed scored some points with its increased focus on issues concerning rural segments and farm-sector.

But, Jaitley’s bad move on EPF tax changes, which will directly impact millions of salaried class, is enough to spoil all those positives and can very well boomerang.

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