EPF taxation: PM Modi hints at full rollback; PMO asks finance ministry to explore other options

March 6: After drawing flak from all corners, finance minister Arun Jaitley is all set to roll back his Budget proposal to tax 60% corpus of the employees’ provident fund (EPF) at the time of withdrawal, at least partially.

A clear indication of a rethink on the part of the government came when Prime Minister Narendra Modi reportedly told Jaitley to “explore ways to review” it.

Jaitley’s announcement to tax EPF in the Budget speech had led to a lot of confusion, after which the government clarified that the tax will apply only to the interest component and that too for voluntary contributors.

It is learnt that the issue was discussed at a high-level meeting between officials of the Prime Minister’s Office (PMO) and finance ministry on March 3. Jaitley is now expected to make an official statement in the House outlining the revised proposal.

The finance minister, while announcing the proposal, had stated that the change in rule is aimed at reducing litigation and increasing transparency. However, the proposed tax provision didn’t find favour with the salaried middle class, employees’ unions, opposition parties and others. Gujarat chief minister and party ally Shiv Sena had voiced concern over the proposal.

Senior BJP ministers and party MPs also counseled the government, fearing that the decision could prove politically costly. The RS-affiliated Bharatiya Mazdoor Sangh too wrote to the government against this step. It also didn’t rule out a joint front with other trade unions agitate against the move.

It’s believed that Modi’s intervention at this point is aimed at stemming the uproar and not to share the credit of rollback with opposition parties.

However, a highly-placed source told dna that the government may not go in for a full rollback and may consider other options to cushion the impact of the proposal.

Sonu Iyer, tax partner & national leader – people advisory services, EY India, too, expects the ministry to balance between its “cause of pensioned society” and the interest of the salaried middle class.

“Actually, there should be some sort of balance between the cause of pensioned society they have in mind (and demand of salaried class). I don’t think it will be a total rollback,” she said.

The new norm proposes to tax 60% of the contribution to an employee’s EPF corpus from April, even as it has kept the remaining 40% tax-free. Simultaneously, it has increased the age of retirement to 58 years from 55 years.

In a clarification by the ministry after initial protests, the government said that if the 60% corpus is invested in an annuity plan, it would be exempted from tax.

However, Iyer said an employee would still end up paying tax, not in lump-sum, but at the time of receiving the annuity every month.

“If you put your money in annuity, every month you get an annuity payment. It is taxable. It is just deferral (of tax payment),” she said.

She said the ministry was trying to bring tax neutrality between EPF and National Pension Scheme (NPS), which has not been affected by the proposed rule. Even private-sector employees, with salaries less than Rs 15,000 per month, have been kept out.

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