Budget 2016: Why government is wrong in taxing EPF

The government would do well to withdraw the ill-thought-through move to tax withdrawals from the Employees' Provident Fund (EPF) and be content with initiating a wide-ranging debate on the subject for now. 

The best way to tax savings is indeed to exempt them at the time of contribution, exempt them at the time of accumulation and tax them at the time of withdrawal. Withdrawal would refer to that part of the matured saving that is not ploughed back into another saving product. The government might think it is precisely such a rational tax treatment it is bringing to bear on EPF, but it is grossly mistaken. 

Taxation has to be equitable. When rich traders and professionals get away without paying tax and the tax base remains constricted, squeezing the salaried employee ever more to raise additional revenue is the opposite of equitable. 

The exempt-exempt-tax (EET) regime can be palatable only when the tax base is wide, the rate of tax is significantly lower than what it is today and the highest marginal rate kicks in only at an appreciably higher income threshold. 

Then again, the insistence that 60% of retirement savings would qualify to be tax-exempt only if invested in annuities has no rational basis. It could well be that the retiree is better off investing the money in, say, a house or a shop that would offer a steady return and also, more importantly, from the point of view of Indian tradition, allow his family to draw immediate benefit from the retirement saving of the family elder. 

Is it minimum government for the state to decide how much of retirement savings should be reinvested and then decide the specific instruments in which the reinvested amount be deployed? 

A new tax regime for retirement savings should kick in for those who are beginning to save for their retirement and have the option of planning their savings in the knowledge that a portion of their retirement corpus could be taxed. This is what was done for those who joined the National Pension System (NPS). Start a discussion on how to achieve tax parity for EPF and NPS members. Act later, based on a broader understanding of the subject. 

Source:-The Economic Times