School of Thought

Arun Jaitley's proposal of taxing provident fund is a cruel joke

The honest taxpayer is left with no assured financial instrument to park his hard-earned salary.

 |  School of Thought  |  4-minute read |   03-03-2016
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Among all the nations that count themselves as the world's evolved democracies, India comes in the bottom pile in terms of providing financial and social security to its citizens, especially senior citizens. With the poor state of welfare in India being an obvious reality, Arun Jaitley's budget this Monday came as a cruel joke, with the proposal of taxing 60 per cent of the interest accumulated on maturity of Employee Provident Fund (EPF, often called PF). Such an unkind decision has never been introduced in India's economic history.

Understanding PF and taxing it is a cruel joke

The government managed retirement savings scheme is a key safety net for the Indian middle class, with equal contributions both from a person's salary (12 per cent) and the company (12 per cent). Before the change in PF scheme, the person would receive the entire amount after retirement, using it for financial support in the later years of life.

Typically in India, a PF withdrawal often enables big ticket expenditure, such as children's weddings, housing need and higher education. So far, the average Indian has depended on the safety net of PF to take care of such life-milestone expenses.

The honest taxpayer, thus is left with no assured financial instrument to park his hard-earned salary. Also making PF taxable amounts to double taxation, since the employee's PF contribution is in any case not tax exempt beyond the 80C ceiling of Rs 1.5 lakh per annum. Interestingly, as Rahul Gandhi puts it, achche din under this government means amnesty-window for black money holders and taxes on the EPF of the working class. The irony couldn't be starker.

Government or Big Brother?

Investments in the equity market continue to be taxfree after a lock-in period of one year. This will motivate more people to join organisations as "consultants" to avoid paying PF, and invest in risk-prone mutual funds and similar instruments. Also, in the words of the finance minister, "The new PF structure incentivises monthly pension/annuity rather than using for conspicuous consumption."

As Priyanka Chaturvedi muses on Twitter, who decides conspicuous consumption on individual salaried class savings? This is strong government interference in personal finance, with a possible ulterior motive to infuse capital to equity market.

Adding insult to the injury, this is only applicable on private sector employees. Unlike government employees, private sector workers do not have guaranteed pension and healthcare plans for their latter years. Of course, the hard facts are lost on the NDA government. Their myopic vision is apparent when they declare workers with monthly salary of more than Rs 15000 "highly-paid employees" and eligible for the new PF structure. Twitterati responded to the scheme with #RollbackEPF trending for the whole day after the budget.

#RollbackEPF - Nation seethes in reaction

Did the strategists in the NDA camp fail to foresee the result of such a harsh policy change? Making the PF taxable works neither for the young population, nor for senior citizens, and will clearly make a dent on BJP's chances in the coming assembly polls. It is estimated that a 25-year-old in the highest tax bracket, will lose Rs 56 lakh as a result of the new PF scheme at the end of his 33 years of service, getting Rs 2.6 crore instead of Rs 3.1 crore. This essentially dis-incentivises Provident Fund, and potentially creates fundamental ripples in the collective behaviour of Indian economy, which is strongly savings driven.

Clarification for a clarification

The mixed messaging from government added fuel to the fire. Mr Jaitley's speech in Parliament implied that the entire PF corpus will be taxed. Following public outrage, Ministry of Finance released a statement clarifying that only the interest earned on 60 per cent of EPF, following April 1, 2016 will be taxed. When the government intends to introduce such a colossal change to tax structure, one would expect better clarity and communication from the concerned agencies.

Derek'O Brien summed up the travesty of the situation in the tweet: "A clarification for a clarification that needs another clarification is no more a clarification. It's comedy".

Rectify the wrong or face the wrath

As many as 11 central trade unions have planned to go on a strike on March 10 as a protest against the PF move. Given the disastrous outpour of public anger, the Modi government is expected to get into damage control mode. Whether it means rolling back the PF decision entirely, or introducing other relief measures will be seen in the days to come.

Nevertheless, India is united in its stand. The rich continue to get away, and the middle class continues to get squeezed with direct and indirect taxation, as the government's scapegoat to cover its fiscal deficit.

But what is public panic today, will lead to public punishment, if not duly addressed - as articulated in an angry tweet - #RollbackEPF or Wait for 2019.


Pawan Khera Pawan Khera @pawankhera

Political Analyst working with the Indian National Congress

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