The rationalisation addresses impending class war. The proposed amendments with respect to taxation of Government Recognised Employee Provident Funds (REPF) is indeed in line with what India voted for and expected Government of India to work for. The tax collections were never the target and remain not very attractive to bring this amendment. This amendment is definitely one of those ‘preventive’ measures to ward-off tsunami of backlash which Central government can expect to receive in short to medium term future.
Let me explain.
Under existing REPF scheme, the tax treatment is EEE ie. in simple language totally tax free.
Under existing NPS scheme, the tax treatment is EET ie taxable at the time of withdrawal of money from the fund.
Enough details of how both schemes work have been written, discussed and shared.
Critical point is the discriminatory tax treatment being adopted in favour of REPF scheme. REPF remains tax free all through and NPS remains fully taxable at the time of withdrawal. It is gross injustice for subscribers under NPS.
Interesting facts to note:
- Since almost over a decade, NPS is the only option available for all new recruits to central government, state government, and public sector companies. Para-military forces like CRPF, SSB, BSF, etc. under Ministry of Home Affairs are also subscribers to NPS.
- National Pension Scheme has attracted more than 1.14 crore subscribers.
- The category of people for whom REPF was created was those who earn upto the minimum statutory wage limit which is currently Rs. 15,000 per month. Of about 3.7 crore subscribers to REPF, about 3 crore fall under sub-Rs 15,000 per month category.
- Of the remaining about 70 lakh subscribers, about 60 lakh subscribers are highly-paid employees of private sector.
We as citizens need to acutely bear in mind the demography affected accurately.
As I said in opening paragraph, we voted for this – ‘this’ here being targeted benefits to prevent leakages.
Yes. Benefits. If one studies the zero-coupon yield curve (ZCYC), one can safely conclude that the average yield varies in range of 7-8%. In theory, government guarantees deficit financing via budgetary allocation in case REPF is unable to generate enough returns and deficit balloons. How does government guarantee? Out of existing tax payers’ money via budgetary allocation. This has to be recovered via any other available tax collection route to address budgetary deficit matter. One important admission to make is that since past couple of years, the deficit in the fund is at manageable level and the EPFO is able to generate enough returns to afford interest rate of 8.75%. Hence, the burden on tax payers as of today only remains potential and not realised as of today.
What proposed tax amendment addresses is:
- All subscribers to REPF who fall within the minimum statutory wage limit which is Rs. 15000 per month – which was the purpose and intent of REPF – would remain fully tax exempt throughout.
- All subscribers to REPF who are outside ambit of stated purpose and intent of REPF ie. above Rs. 15000 per month income, would be taxed only if withdrawals are in excess of 40% of the fund amount.
- All subscribers to NPS, not a burden on tax payers as returns are totally market-linked and who were earlier unjustly taxed on entire amount, are given same benefit as REPF subscribers ie. withdrawal in excess of 40% of the fund amount would be taxed. This ends tax discrimination.
Thus the proposed amendment:
- protects small contributors to REPF
- ends discriminatory tax treatment between the two schemes
In keeping with promise of ‘no retrospective tax amendments’, the government has rightly included for taxation only those REPF contributions which are made after 1st April 2016 and interest on those contributions. Hence the existing corpus under the scheme upto 31st March 2016 remains tax exempt.
Another interesting point to note is that about 60 lakh subscribers would get affected, they are surely not retiring in forthcoming financial year. Only some of them would. Of those, only some may choose to withdraw in excess of 40%. Besides taxation would be only on amount contributed and interest earned post 1st April 2016. Hence, as I have mentioned in first paragraph, higher tax collection was never the agenda for bring this amendment.
I would suggest Ministry of Finance to consider the following points:
- Bring absolute scheme parity for above minimum-statutory-wage-limit REPF subscribers and NPS.
- Guarantee deficit financing only to the extent of funds under management for subscribers below minimum statutory wage limit
- If Ministry is considering taxing only interest part post 1st April 2016 for REPF, extend same benefit to NPS subscribers as well.
- Make public a research paper (without RTI please) on the REPF and NPS subscriptions – demography of subscribers viz, age, gender, central government, state government, public sector organisations, para-military, private sector, employee location-state, classification of subscribers as per income buckets ie upto Rs 15000 per month, Rs 15000-30000 pm, Rs. 30000-100000 pm, above Rs. 100000 pm.
I would insist readers to revisit the points under ‘Interesting facts to note’ mentioned above. Considering that, one important matter to note is without this amendment, as a nation, we are creating two class of retirement schemes – one tax-exempt scheme ie REPF and other tax-paying market-linked NPS. Please realise the danger of having same class of employees at same rank working in same organisation being meted out differential tax treatment with one class REPF receiving state guarantee and another class NPS subject to market-risks. We are talking millions of them in both government and private employment. It is a potential time bomb – the class war which I have spoken in opening paragraph.
Now based on suggestions I read on social media, some argue in favour of differential tax treatment, some talk of lack of option at the employees’ end to take subscription decision in REPF, some speak of linking interest/returns on corpus to markets instead of indirectly taxing them at the time of withdrawal, some suggest bring parity by making all retirement products tax exempt. I am not deliberating on that.
I may have missed to notice some intricacies, but my point remains straight – prevent leakage of government-guaranteed-returns (at cost to tax payers) towards those who can afford and bring parity between the schemes. How it is achieved, I leave it to wisdom of the government as it has received good amount of suggestions from wide-spectrum of demography.
In this whole matter, the media has driven controversy and misled ’employee class’ in massive way. The out-of-thin-air tax calculations by media ‘experts’ projecting additional tax expense at 10-40 lakhs, has only scared people and which is effectively fueled by non-existent or ineffective communication/media-bites from government side.
Not to miss to bring to notice of PM Narendra Modi, FM Arun Jaitley and Council of Ministers, yet again, that BJP-led NDA government has been very poor in communicating with citizens, clarifying and calming nerves. Be proactive than reactive.
Update:
Clarification on ‘bringing parity between REPF and NPS’ as mentioned above under ‘suggestions to Ministry of Finance’:
As pointed in the above post, the tax revenue is not going to be significant. Hence in such situation, parity would work both ways – If REPF is totally exempt, make NPS totally exempt too. If even high-income earning subscribers of REPF receive State guarantee, the susbcribers of NPS too should receive State guarantee or State guarantee for high-income earning REPF class should be withdrawn & brought at par with NPS.
If we have elected BJP-led NDA government on promise of ‘minimum government, maximum governance’, it is obvious what choice the government is going to make in this regard for above Rs. 15000 per month income earning subscribers.