The EPF mess and how not to bring in a taxation change

The Union Budget 2016 was largely seen as a pro-farmer- anti-big shots, pro-jobs and pro-small businesses due to many measures taken to uplift these sectors. But there has been one issue which has hurt the “middle-class” of India: Bringing PF under tax ambit.

Until now EPF has been the holy grail of all salaried employees. Tax free at all stages from deposit to withdrawal, secure, and a very high rate of Interest. Now, with a prospective effect, the returns are going to diminish significantly since part of the proceeds maybe taxed. Without going into the technical details, there have also been some pre-budget moves to make withdrawal of money from EPF harder.

Why has the Government suddenly turned towards EPF?

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The stated objective of the Government, as per the PIB release and other statements is this:

The Government wants EPF kitty to be used by people as a post-retirement fund from which they can earn pension. The people on the other hand use EPF for various purposes, and often withdraw large sums from the account, much before retirement to meet expenses arising from weddings, education or anything they deem fit. The Government is of the view that they have given you a completely tax-free instrument, for your retirement security, and not for your expenses before that, so if you want to spend it before retirement, we will tax you.

Firstly, the Government’s intention is not completely wrong. There can be situations where a person withdraws money prematurely and then is left with nothing at his retirement. The Government just wants to avoid this situation.

But, the means used to arrive at this desired goal are completely wrong. They have failed to factor in that for decades now, people have looked at and used EPF from a completely different angle, and now, midway through one cant just change the rules of the game. Sure, the money which has been deposited pre-April 2016 will not be touched, but still, it is a setback for those who though EPF will help them accumulate money for the any big expense lined up.

Another reason for taxing EPF now is to bring it on par with NPS. NPS is the pension scheme started last year, probably to help take forward the intention of providing retirement security. But till recently, NPS was not competitive as compared to EPF due to different taxation policy. Now, what the Government has done is made both NPS and EPF taxable equally, ensuring parity, and in short nudging people to move towards NPS.

Again, the means used to nudge people to NPS are wrong. It was widely expected that to bring both the schemes on par, NPS will also be made exempt throughout, like EPF, but the Government has gone in the other direction.

Even with this approach, which has now drawn lot of flak, the Government could have reduced the brickbats, but the entire approach to this change has been miserably unplanned. This is just an extension of the abysmal communication skills of this Government.

Before we study how they messed it up here, jog your memory to another scheme which pinched the common man but was implemented largely successfully: The Give it Up campaign. PM Modi made many appeals to Indians (who can afford to do so) to give up voluntarily, their LPG subsidy. There was a clear explanation of rationale: that this subsidy is meant for the poor and not for those who can afford it, and it burdens the Government. The call was largely successful.

By December 2015, it was reported that over 57 lakh LPG consumers had voluntarily given up their subsidies. And that was when the next phase was implemented: Withdrawal of subsidy for those who earn above Rs 10 lacs. Here was a scheme, where the Government made efforts to educate people, get the public sentiment on their, and then brought in a rule to implement it.

Contrast this with the EPF taxation move. Sure, the amounts involved are different, the scheme is different, but see the non-existent messaging here. First see what the Finance Minister’s speech had to say on this:

Pension schemes offer financial protection to senior citizens. I believe that the tax treatment should be uniform for defined benefit and defined contribution pension plans. I propose to make withdrawal up to 40% of the corpus at the time of retirement tax exempt in the case of National Pension Scheme. In case of superannuation funds and recognized provident funds, including EPF, the same norm of 40% of corpus to be tax free will apply in respect of corpus created out of contributions made after 1.4.2016.

This is all that was said by Arun Jaitley on this issue. Nowhere, the intention of the Government was highlighted in his speech. If you don’t even tell me that what you are doing is good for me, why should even imagine that it is even remotely good? The finance bill too is silent on this. It is only the PIB clarification, which comes after a lot of outrage, which states this. Obviously, people are going to take this as an after-thought and not the main objective. Who is to blame for this?

And it gets worse. There was complete lack of coordination between what different faces of the Government said:

1

(sources: Budget Speech, NDTV interview, ANI statement, Press Conference, PIB release)

Not only did the Government fail to communicate why they want to do what they are doing, they also chose a very tax-payer unfriendly means for the same, and then completely bungled up the response. The more bitter the pill, the more sugar coated it has to be, and here the forgot the sugar coating and also the candy after the pill!

co-founder, OpIndia.com

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