Low-wage earners face EPF tax blow

Union Budget 2016-17 holds another tax whammy for employees’ provident fund savings which will particularly hurt millions of low-income workers earning as little as Rs.5,000 a month.

Such employees would be taxed at the highest marginal income tax rate of 34.6 per cent if they withdraw EPF savings of Rs 50,000 or more, before completing five years of continuous service. The tax, officials said, is to be levied at the highest personal tax rate for those members who don’t have a PAN card, according to the Finance Ministry. For those with a PAN card, the tax is levied at 10.3 per cent.

“Those with a balance of just Rs.50,000 in their EPF account, after, say 59 months of service, are essentially low income workers who are not liable to pay tax to begin with. Yet they will be taxed at the rate applicable for those earning over a crore of rupees a year,” a senior labour ministry official said.

To put that in perspective, banks deduct income tax at 10.3 per cent on interest income of over Rs.10,000 earned from fixed deposits. In cases where a depositor hasn’t shared his PAN card details with the bank, such interest income is taxed at 20.6 per cent. Separately, a PAN number is mandatory for jewellery purchases over Rs. one lakh. Personal income is tax-free in the country for those earning about Rs.21,000 a month or Rs.2.5 lakh a year.

An EPF account is mandatory for all employees earning up to Rs.15,000 per month (raised recently from Rs.6,500 per month) in firms employing over 20 workers. As per the law, 24 per cent of an employee’s salary is contributed to EPFO as a social security net for old age – a part of that (8.33 per cent) is diverted to an employees’ pension scheme (EPS).

The annexure to Part B of Finance Minister Arun Jaitley’s Budget speech, which deals with direct tax proposals, sets a Rs.50,000 threshold for deducting tax at source on EPF savings withdrawn before five years of service under section 192A of the Income Tax Act. The limit was set at Rs.30,000 last year, when the TDS provision was first introduced.

“We have repeatedly told the finance ministry to review the Rs.30,000 ceiling and do away with this highest tax rate provision for those not having PAN cards. If savings beyond a threshold have to be taxed, they could be taxed at 10 per cent. But they have raised the threshold by a ridiculous amount and refused to accede our request to lower the effective tax rate,” the official said, adding that nearly 85 per cent of EPF members don’t have PAN cards.

According to The Hindu’s calculations, verified with tax and retirement savings experts, those earning around Rs.5,400 a month (or as little as Rs.65,000 a year) and covered by the EPFO would accumulate around Rs.50,000 in 59 months, even without factoring in the annual interest credits. This assumes 15.67 per cent of the salary is deposited into the EPF account, with the rest invested in the EPS.

Continuous service

The labour ministry official stressed that the government doesn’t guarantee five years of continuous service in a firm covered by the EPF Act and cannot penalise an employee if they are forced to change their employment from a large firm to a small firm, or lose their job before the five year cut-off period.

“This is a very regressive move and would not only lead to taxing those who are not part of the tax net or pushing them to get a PAN card though their income is well below the taxable limit, but also create a huge compliance and paperwork headache for employers as well as the EPFO, who would have to issue tax deduction certificates,” said Amit Gopal, senior vice president at India Life Capital, a firm that advises corporate India on retirement funds.

The government has defended its proposal to tax 60 per cent of EPF savings as a tool to push people into the pension habit and said that only high-income workers would be affected, while those earning upto Rs.15,000 a month won’t be taxed.

Senior officials in the labour ministry and EPFO have argued that those earning over Rs.1.8 lakh a month cannot be considered high-income workers.

“Why should someone who earns between Rs. 0.8 lakh and Rs.2.5 lakh a year, be required to pay tax on his savings at the time of retirement? Such members never claimed a tax deduction n her or his EPF contribution to begin with,” the official said, adding the same logic applies in the case of tax on premature withdrawals.

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RBI pores over budget, worries on fiscal math

Some Reserve Bank of India (RBI) officials are worried that a populist budget could put the onus of driving growth on them but limit their ability to respond through big rate cuts this year.

Finance Minister Arun Jaitley increased spending on farm and social sectors in the 2016-17 fiscal year on Monday in a boost to rural India, where most of the country's 1.3 billion people live.

He curbed capital expenditure growth compared to the previous year, yet stuck to his commitment to reduce the fiscal deficit to 3.5 percent of gross domestic product.

Three policymakers aware of the central bank's deliberations on the budget said they are combing through the numbers to test how Jaitley struck a balance, and question some of the assumptions.

An expected $16.6 billion salary and pensions hike for government employees, for example, is inflationary and hasn't been fully accounted for in the budget, they said.

Also, they said the government's revenue expectation from asset sales appeared optimistic given that these fell nearly two-thirds short of the target in 2015-16.

Additional expenses on salaries and a shortfall in receipts could force the government to cut back on capital expenditure to meet its fiscal deficit target. That would hit growth and increase pressure on the RBI to do more, the officials said. "If private investment doesn't pick up, the burden on monetary policy to boost growth will increase," one of them said. A finance ministry official said the impact of higher salaries on inflation will be marginal.

On Thursday, Junior Finance Minister Jayant Sinha acknowledged that a tight fiscal policy will help in further monetary policy easing.

"If we don't provide that (macroeconomic stability) space to monetary policy by generally running a relatively tighter fiscal policy, we cannot expect monetary policy to loosen up as a result of that," Sinha said at an event.

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Budget to bet on spurring growth

The Union Budget for 2016-17 will primarily focus on stimulating growth without deviating too much from the fiscal deficit target set by the Finance Minister Arun Jaitley in his previous Budget, Economic Affairs Secretary Shaktikanta Das indicated on Monday.

Mr. Jaitley had set a fiscal deficit target of 3.9 per cent of GDP for 2015-16, paring it further to 3.5 per cent for 2016-17 and 3 per cent for 2017-18. However, with the economic recovery still tentative and private sector investments remaining elusive, there has been a growing clamour for the government to relax its deficit targets in order to pump prime the economy via enhanced public investments.

The economic affairs secretary emphasised that the global economy and market movements are far more unpredictable today than ever before, yet India’s growth is healthy.

“Unexpectedly, markets are crashing, currencies are depreciating. Whatever happens in the rest of the world affects us because India is getting increasingly globalised. I think amidst all these problems, when we are in a turbulent sea, India is staying afloat and not just that… this year… we are expecting a growth of 7.6 per cent which can be considered as very good, given the circumstances,” he stressed.

“The government is committed to see that we not only continue this growth but increase it,” Mr. Das said. “There are people who say we should not be worried about borrowing and that spending is where the focus should be. The other school of thought is that we must hold the fiscal deficit tightly because our repayment capability will be otherwise affected. The reality is somewhere in the middle,” he said.

“Given the fiscal constraints, it is the government’s endeavour to present a budget which is growth oriented and maintains the momentum of growth and tries to develop on it,” Mr. Das said during an interview on the Finance Ministry’s YouTube channel. He also said that growth was the key for job creation and economic development.

“The world economy today is experiencing volatility and uncertainty which we never saw earlier. There was a time when we used to say that we didn’t know what was going to happen next week in Europe. But today, we have come to a position where we don’t know what’s going to happen the next day in any part of the world,” he said.

For Budget 2016-17, the government invited suggestions from citizens through Twitter for the first time, even conducting a series of polls to gauge public priorities and expectations from the budget.

“Usually, around 50-60 per cent of the proposals are repeated every year. We analyse these as well because the situation is always changing. Just because we couldn’t take it last time doesn’t mean we won’t look at it this time,” Mr. Das said.

Some of the new suggestions are administrative in nature and can be examined at any point in the year. “So, we take out what really relates to the budget process and then we have dedicated teams for examining these proposals,” the secretary said.

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