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07 MAY, 2017 (MAINS)

TODAYS ANSWER WRITING CHALLENGE FROM GS-III

 

Q1. In an attempt to equalize the tax treatment of the National Pension System (NPS) and the Employees’ Provident Fund (EPF), the Union budget has proposed that 60 percent of an investor’s EPF corpus resulting from contributions made after April 1 be taxed at withdrawal. Why has this been done? What have been the consequences of this decision? Discuss. (200 Words)  

 

Please write the answer in comments section

  • Kamlesh Twari

    Need
    • The Government in the need for the government to control expenditure to control the Fiscal Policy & In an attempt to equalize the tax treatment.
    • Government does not want citizens to withdraw money in lump sums at retirement but like it 40% to be invested in annuity programs.
    • Out of 34 OECD nations apart from 1 no nation gives tax exemption on EPF at all three Phases i.e. Deposits, Accumulation and Withdrawal.
    • Making a pensioned society for take care of retired ones.
    • As more the money in circulation, greater the liquidity in economy and lower will be the occurrence of crises.
    • To bring revenues to the govt. pocket which can be further used to enhance social security measures in rural areas as well as increase capital investments.
    CONSEQUENCES
    • This would lead to less income in the hands at the time of retirement.
    • Lead to economic as well as political consequences
    • Government coffers may get boosted which they can spend on schemes for marginalized sections of society.
    • Social security post retirement as 60% corpus in EPF wouldn’t attract taxes if invested in annuity scheme.
    Middle class workers hardest hit: as they constitute majority of the EPF beneficiaries, they’ll be the majority of section to suffer from tax.

  • Osho Korde

    The Employee’s Provident Fund id retirement benefit scheme that was structured to provide financial security to employees of factories and other establishments post-retirement.
    Reasons of doing this:
    • Announcing the imposition of tax on 60% of the withdrawal amount from EPF, the government in its Budget document argues that it was being done to bring greater parity in the tax treatment of different types of pension plans.
    • the purpose of this reform of making the change in tax regime is to encourage more number of private sector employees to go for pension security after retirement.
    Consequences:
    I. Pros:
    • It has brought parity among provident fund, pension funds and the National Pension System (NPS)
    • In case the employee puts 60% of the corpus in annuity, the entire corpus becomes tax free.
    II. Cons:
    • EPFO is the only retirement saving for workers in the low-income group, and an imposition of tax at the time of withdrawal robs them of a sizeable portion of their long-term savings.
    • A majority of low income workers withdraw their EPF money in full at the time of retirement to buy a house or for other important purposes and this restriction of imposing tax on 60 % of the corpus erects hurdles to achieve their goal.

  • Ashish

    EPFO savings enjoy the status of EEE, that is, they are exempt from tax at the three stages of Deposits Accumulation and Withdrawal. While NPS enjoys the status of EE, that is, it is tax exempt only during the stage of Deposits and Accumulation but not at withdrawal stage
    This difference has led to EPF having a large subscriber base with huge savings, but its savings are mainly directed towards Government securities etc which reduce the long term credit availability for infrastructure companies among others. With the investment decisions at EPFO taken by a tripartite committee which is generally lethargic to make changes
    So to correct this anomaly Union Budget has proposed that 60 percent of an investor’s EPF corpus resulting from contributions made after April 1 be taxed at withdrawal [Finance Bill Route]
    Reasons
    • Moving towards a pensioned society
    Government does not want citizens to withdraw money in lump sums at retirement but like it to be invested in annuity programs. NPS as a scheme mandates that at the time of withdrawal only 60% can be taken in lump sum and other 40% has to be invested in annuity.
    • To bring NPS at par with EPF. NPS which is 40% tax exempt and now making 60% of EPF taxable brings both at par.
    • Out of 34 OECD nations apart from 1 no nation gives tax exemption on EPF at all three stages.This is an indication of moving away from benefits accrued on government policies.
    Consequences:
    • Implications of this move will be far and wide, a 25 years old working professional starting his job on 1st April 2016 can loose almost 1/5th of this savings at the time of retirement.
    • In a country like ours where citizens are not in a social security net (unlike other OECD countries) a move like this is a hard hit on salaried employees.
    • EPF acts a safety net in contingency to meet episodic high spending in health or meeting education cost of children etc so taxation proposal by government seems to miss ground picture

    In the current era of bankruptcy of welfare states like Greece, such a move is necessary, but government should move slowly by first strengthening its social security network.