Will Jaitley reverse EPF rate cut move amid trade union protests? All you need to know

The Narendra Modi-government is likely to run into another problem with respect to the Employee Provident Fund (EPF) issue after the trade unions threatened protests on Friday against the decision to lower the EPF rate.



Early this week, the Finance Ministry decided an EPF rate of 8.7 per cent, lower than what the Central Board of Trustees (CBT) decided 8.8 per cent. Even the RSS-backed Bharatiya Mazdoor Sangh has called for protests against the move saying this would impact the working class.  The EPFO has also contested the Finance Ministry’s decision to cut rates.

As Firstpost highlighted on Tuesday, the decision to lower EPF rate is a bold move since the overall lending rates in the economy can come down only if the savings rate come down. Though it is a politically negative step for the government, especially in the context of the ongoing state elections and the issue concerns a large section of working population, economists have lauded the government’s decision as directionally positive. The question is: Will the government succumb to the pressure of trade unions for the third time and reverse the decision?

They have done so twice in the recent past on the EPF issue.

EPF U-turns

Early this month, the government rolled back its decision to restrict the premature withdrawal of retirement fund by an employee facing protests. It had proposed to bar withdrawal of employer's contribution to the provident fund corpus until the employee attains the age of 58 years. But, trade unions, especially garment workers in the southern part of the country, vehemently protested against the move saying they aren’t sure if they will work after turning 50 and will have to wait for too long to get their  money back.

A February 10 notification from the government said an employee contributing to the Employees's Provident Fund will not be allowed to withdraw the entire corpus. It basically meant that anyone who has been unemployed for two months or more can now withdraw only his own contribution into the Employees' Provident Fund and the interest that has accumulated on it.

Further, the second portion i.e. the employer's contribution to the EPF and the interest accumulated on it can only be withdrawn at the retirement age of 58. Previously, an employee could withdraw the entire corpus accumulated under the EPF tax free.

Budget proposal on EPF taxation

The first major clash of the Modi-government with trade unions on the EPF issue happened when, in the Union budget for 2016-17, the government proposed taxation on withdrawal in excess of 40 percent of the accumulated corpus.  Finance Minister Arun Jaitley had clarified that the idea was not to increase revenues but to achieve the policy objective of creating a pensioned society.

The proposal gave rise to outrage among the salaried class. An online petition against retirement fund tax went viral on social media seeking urgent and immediate withdrawal of the proposal just a day after it was announced in the Budget forcing the government to review its proposal.

In early March, the Centre withdrew the proposal. The government also revoked the proposal to limit non-taxable employers’ contribution to PF accounts at Rs 1.5 lakh. Finance minister Arun Jaitley, however, said the proposal to keep 40 per cent of withdrawals from the National Pension System (NPS) accounts tax-free stayed unchanged.

But, by then  the damage was done. The salaried class, the constituency of the ruling BJP, got an impression that the government is anti-worker.

Where did government go wrong?

Prima facie, the government’s intention was to make the EPF schemes better to ensure safer post-retirement life to the working class. But, it has failed to come out with a comprehensive reform-plan on the matter after consulting with all stakeholders. Instead, it chose to announce a poorly thought-out hurried decision, only to roll back when the decisions were challenged by the trade unions.

EPF is a politically sensitive issue in India since the country doesn’t offer any retirement fund system to its citizens that can take care of their needs, unlike developed nations. For most of the employees in the middle-income group, EPF is the only retirement savings. This is the reason why even a marginal 10 bps reduction in interest rates has irked the employees. Theoretically, an 8.7 per cent rate is still good given the low inflation scenario that makes the final returns positive.

According to this PTI report, the government is unmoved on the protest calls of the trade unions on the EPF issue and will not go back on the decision, come what may. “There is no question of going back on 8.7 per cent,” the report quoted a top finance ministry official.

Still, it needs to be seen how the Modi-government will tackle its anti-worker image and handle the latest problem it faces, if the protests intensify.

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Updated Date: Apr 27, 2016 12:09:20 IST

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