Govt buries EPF tax after massive protest from salaried middle-class

FM retains tax exemption for National Pension System

Just over a week after the announcement, Finance Minister Arun Jaitley on Tuesday rolled back his controversial Budget proposal to tax Employees' Provident Fund (EPF) withdrawal. The Budget had announced that 40 per cent of the total corpus withdrawn from the EPF would be tax-exempt and the balance 60 per cent would be taxable unless the amount is used to buy an annuity product. Jaitley also took back his earlier proposal to tax contribution made by an employer beyond Rs 1.5 lakh a year to EPF. Both the proposals had drawn strong protest from the Opposition, trade unions and the salaried class.

Jaitley, however, retained a proposal not to tax 40 per cent of money withdrawn from National Pension System (NPS). This means that only balance 60 per cent would be taxed against the current practice of taxing the entire amount withdrawn from NPS.

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Making a suo motu statement in the Lok Sabha on the issue, Jaitley said, "In view of the representations received, the government would like to do comprehensive review of this proposal and therefore I withdraw the proposals in paragraph 138 and 139 of my Budget speech. The proposal of 40 per cent exemption given to NPS subscribers at the time of withdrawal remains." Paragraph 138 proposed to tax money withdrawn from EPF beyond 40 per cent, if the sum is not invested in annuity. Paragraph 139 proposed to tax contribution made by an employer exceeding Rs 1.50 lakh in EPF a year. Both the proposals were to come into effect from April 1, 2016.

After this, no amount withdrawn from EPF account would be taxed, whether it is invested in annuity or not. In other words, the present situation continues. The FM did not alter paragraph 137 of the speech which proposed not to tax 40 per cent of the corpus withdrawn from NPS at the time of retirement. Jaitley had earlier indicated that he would address the concerns on retirement tax when he replies to the debate on Budget 2016-17 in Parliament, which would start from Wednesday in the Lok Sabha.

The Budget proposals on EPF tax drew flak from both employee unions and political parties who said the government was taxing employees at the fag-end of their career, when they needed money the most. "The government has been forced to roll it back under continuous pressure from the unions," said A K Padmanabhan, president of Centre of Indian Trade Unions (CITU) and a board member of EPF Organisation.

The government had justified the move saying the attempt was to create a pensioned society.

A day after the Budget, it had indicated in a statement that it could consider imposing tax only on the interest part of the corpus for withdrawal of money beyond 40 per cent in lump sum.

But Tuesday's announcement completely rolled back the EPF tax proposal.

In his statement, Jaitley said a number of representations had been received from various sections of the society, including MPs, suggesting that this would force people to invest in annuity product even if they were not willing to do so.

CENTRE’S PREVIOUS FLIP-FLOPS:

Finance Minister Arun Jaitley’s withdrawal of Budget proposal to levy tax on Employees Provident Fund (EPF) withdrawals is one of several occasions in past 21 months when the Centre has reconsidered its position:

• MGNREGA: In one of his early speeches in the Lok Sabha, PM Narendra Modi had trashed it as a living monument to Congress’ failures. In this Budget, the government has allocated highest-ever funds for the scheme
• Aadhaar Bill: BJP had rejected UPA’s National Identification Authority of India Bill, 2010. However, the govt is now pushing for a Money Bill, which is almost identical
• Land Bill: Centre issued ordinances and vowed to amend UPA’s 2013 Land Bill to make it pro-industry. The Bill is now slated to be withdrawn
• MAT: Rolled back past cases of Minimum Alternate Tax on foreign portfolio investors
• ITR forms: Government had to drop new Income-Tax Return forms introduced in March 2015 after being criticised for seeking details like foreign travels and dormant bank accounts
• Insurance Laws (Amendment) Bill: BJP had blocked the Insurance Bill during UPA rule. Once in power, it ensured passage of the Bill in both Houses
• Internet porn ban: Last August, Centre moved to block access to 850 pornographic websites. However, after criticism, it restricted the ban to child pornography

"The main argument is that the employee should have choice of desire where to invest. Theoretically, such freedom is desirable but it is important for the government to achieve policy objectives by the instrumentality of taxation. In the present reform the policy objective is not to get more revenue but to encourage the people to join the pension scheme. There are various suggestions received, which can also achieve the same policy objective of encouraging people to join the pension scheme," he said.

The government had given these proposals in the Budget because Pension Fund Regulatory and Development Authority (PFRDA) demanded tax parity with EPF. It had proposed EEE (exempt, exempt, exempt) treatment at all stages of contribution, accretion and withdrawal from NPS. With Tuesday's announcement, tax parity would still not be there between NPS and EPF, but NPS would be in a better situation that earlier.

At a FICCI event later, minister of state for finance Jayant Sinha attributed the roll back to legitimate concerns by lots of people.

Tapati Ghose, partner, Deloitte Haskins & Sells said, "EPF will hence continue to be an attractive investment option with an EEE scheme. The icing on the cake is that the exemption provided for 40 per cent withdrawal from the NPS corpus still remains. The NPS scheme would hence now move from an EET scheme to a partially exempt scheme at the time of withdrawal, making this more attractive."

The Employee Provident Fund Organisation has around 37 million members across India. As many as 30 million of them earn less than Rs 15,000 a month, who would not have been impacted by the Budget proposals.