Government mulls partial rollback of PF tax

11 trade unions plan nationwide strike March 10.

Facing all-round criticism, the government on Tuesday promised to consider demands for a partial rollback of the proposal to tax 60 per cent of withdrawals from provident fund accounts and a ceiling on employers’ contributions. It also clarified that the Public Provident Fund (PPF) will continue to remain tax-exempt.

The finance ministry said it was looking into demands that only the interest generated on contributions made after April 1, 2016 should be taxed and that the principal amount remain tax-free. The finance ministry also tried to create the impression that only “highly-paid employees of private sector companies” will be impacted by the move to levy a tax on EPF.

However, even Sangh Parivar affiliates like the Bharatiya Mazdoor Sangh (BMS) were annoyed over the proposal to tax EPF, with BMS leaders taking up the issue with finance minister Arun Jaitley on Tuesday. After meeting Mr Jaitley, BMS general secretary Virjesh Upadhyay said the finance minister had assured them the government was still discussing the issue and a final decision would be taken after it was discussed with Prime Minister Narendra Modi. The issue also came up at the NDA meeting which was also attended by Mr Modi. Sources said some NDA MPs had raised the issue, and urged the government to reconsider its proposal to tax EPF.

Some 11 central trade unions have planned to go on a day’s nationwide general strike on March 10. A petition has also been initiated on change.org to roll back the tax on provident fund withdrawals, and it has already been signed by over 19,000 people. Minister of state for finance Jayant Sinha told reporters later: “The government is looking into the issue.”

Confusion prevailed on the issue of taxation on EPF all through Tuesday. Earlier, revenue secretary Hashmukh Adhia was quoted by PTI as saying only 60 per cent of interest on contributions made after April 1, 2016 would be taxed and that the principal amount of contribution will remain untouched at the time of withdrawal. However, in the evening a press release issued by the finance ministry said that suggestions from various quarters to tax only the interest and not the principal was under consideration. Mr Adhia also said later there were demands being made to this effect, and these would be taken into consideration.

The finance ministry said the purpose of “this reform of making the change in tax regime is to encourage more numbers of private sector employees to go for pension security after retirement instead of withdrawing the entire money from the provident fund account”.

A statement read: “Towards this objective, the government has announced that 40 per cent of the total corpus withdrawn at the time of retirement will be tax exempt both under the recognised provident fund and under NPS.”

The ministry said it was expected employees of private companies would place the remaining 60 per cent of the corpus in annuity, out of which they can get a regular pension. “When this 60 per cent of the remaining corpus is invested in annuity, no tax is chargeable. So what it means is that the entire corpus will be tax-free, if invested in annuity,” it said.

The finance ministry claimed the main category of people for whom the EPF scheme was created were members of EPFO, who are within the statutory wage limit of Rs 15,000 per month. “Out of around 3.7 crores contributing members of EPFO as on today, around 3 crore subscribers are in this category. For this category of people, there is not going to be any change in the new dispensation.”

However, the ministry said in EPFO, there are about 60 lakh contributing members who have accepted EPF voluntarily and “they are highly-paid employees of private sector companies”. It added: “For this category of people, the amount at present can be withdrawn without any tax liability. We are changing this. What we are saying is such employee can withdraw without tax liability provided he contributes 60 per cent in annuity product so that pension security can be created for him according to his earning level. However, if he chooses not to put any amount in annuity product, tax will not be charged on 40 per cent.”

It said the ministry has got representations from various sections suggesting if the amount of 60 per cent of corpus was not invested in annuity products, tax should be levied only on accumulated returns on the corpus and not on the contributed amount. It said the ministry has also received representations asking for not having any monetary limit on the employer contribution under EPF because such a limit is not there in NPS. “The finance minister would be considering all these suggestions and taking a view on it in due course,” the statement added.