An ambiguous levy

18th February, 2021 Economy

Context:

Finance Minister Nirmala Sitharaman has stressed that Budget 2021-22 raises resources to push the economy without increased taxation.
However, one change to the income tax law proposed in the Finance Bill, 2021, has triggered anxieties for the salaried class: withdrawing tax exemption on interest income accrued into Provident Fund accounts arising out of employee contributions exceeding Rs. 2.5 lakh ‘in a previous year in that fund,’ on or after April 1, 2021.

Rationale:

Some employees are contributing huge amounts into their PF accounts and getting tax-free incomes.
Subsequently, the Revenue Department has pointed out the tax will only affect a small group of ‘high net-worth individuals’ (HNIs); the 100 largest employees’ PF (EPF) accounts had a combined balance of over Rs. 2,000 crore.
It can be no one’s case that a social security scheme for formal sector workers should become an investment haven for the well-heeled corporate top brass.
The threshold proposed to exclude the so-called HNIs appears low, as it would end up partially taxing PF income for even those putting away Rs. 21,000 a month towards their retirement — hardly a typical HNI given it may take the saver decades to attain a one crore rupee PF balance.
The threshold also does not tie in with the Rs. 7.5 lakh limit set in last year’s Budget for employers’ contributions into the EPF, National Pension System (NPS) or other superannuation funds.

Analysis:

This is not the first time this government had tried to tax PF savings, citing its abuse by the rich. In the 2016-17 Budget, it proposed to tax 60% of EPF balances at the time of withdrawal, but backtracked after a backlash.
Now, it has covered even government employees’ contributions into the GPF, but left NPS investments over Rs. 2.5 lakh a year untouched.
Tax treatment inequity between India’s limited retirement savings instruments aside, employees and employers have some serious doubts on the implementation.
The words ‘in a previous year’, for one, suggest this will be a type of retro-active tax — taxing future income even on past years’ contributions of over Rs. 2.5 lakh.
It is also not clear when and how the tax is to be paid — at retirement or each year that the PF rate is announced.
Finally, this may not be smart timing for a government looking to lean on huge borrowings to dent large inflows into EPF — most of its corpus is captively deployed in government bonds.
While the goal of targeting HNIs using the PF savings to avoid taxation is laudable, the Centre should consider recalibrating the arithmetic and operational details of this tax.

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