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Wrong policy interventions

In the wake of rising protests, the Centre on Tuesday put on hold its decision to impose tighter rules for the withdrawal of Employees Provident Fund (EPF) money, as garment workers in Bengaluru voiced their anger. “The notification (tightening EPF withdrawal norms) will be kept in abeyance for three months till July 31, 2016,” Labour Minister Bandaru Dattatreya said. The current controversy has been marked by significant policy interventions from the Centre that would have brought about serious changes to the way EPF works, followed by a quick about face. During his Budget speech, Finance Minister Arun Jaitley had announced that the government would tax 60 percent of the savings accrued from EPF at the time of withdrawal. After an outcry from various sections of the salaried class, the government finally rolled back the measure, saying it would only tax the interest earned on the fund. However, the government also announced that the employer’s share of the contribution to the EPF cannot be withdrawn until employees turn 58. Before this column gets into greater detail, here is a quick primer on how EPF works and why the government’s decision has caused so much consternation.  

The EPF works as a savings instrument, where a percentage of the salary is put aside into a fund. Salaried employees contribute 12 percent of their basic salary towards the fund and their employers match that sum. The aggregate amount is then placed with the Employee Provident Fund Organisation. The organisation then invests the total sum gathered, where interest is generated and a corpus built for the employee. Before the Centre’s intervention, the savings weren’t taxed at the time of investment, on the interest earned and at the time of withdrawal on maturation. The Centre’s initial decision to impose a tax on 60 percent of savings was based on its desire to bring EPF in line with the National Pension Scheme—a government savings initiative launched in 2004. But there are two key reasons why salaried workers choose EPFO over the NPS. First, unlike EPFO withdrawals, NPS withdrawals are taxed. Second, the NPS offers returns from the unpredictable stock markets, while the EPFO offers subscribers a high rate or return at minimal risk. Suffice to say, the Modi government has been trying to reverse this dynamic. “If the Provident Fund is stable, growing, and earning an income without going to financial markets, then why should crores of people’s retirement savings be exposed to risk?” asked AK Padmanabhan, the president of the Centre of Indian Trade Unions. “If the financial markets fall, and we have seen several such crashes recently, then who will be responsible for the vagaries of markets?” These are, of course, very valid questions that the government has failed to answer.

After receiving scathing criticism from the general public on its proposal, the Centre issued a clarification that even the 60 percent of the withdrawal on EPF will not be taxed if the savings were invested in annuities. To the uninitiated, an annuity refers to a type of investment scheme that entitles the investor to a series of quarterly, monthly or annual sums. In other words, the salaried worker, who depends on his/her EPF savings for economic security after retirement, is now forced to either re-invest the sum in annuities or forced to pay tax on it. If the government’s idea was to incentivise savings in the NPS, it could have taxed private insurance products. Instead, what the government has done is push salaried workers to invest in annuity products offered by insurance companies. “Around 3.7 crore EPF members may be fretting over the government’s proposal to tax 60 percent of the corpus unless it is diverted into an annuity plan, but there is a conspicuous cheer from one corner — life insurance companies,” according to a report in a leading English daily. “They are the only ones offering annuity products and could end up as the beneficiaries of any move that potentially forces a portion of the EPF money to flow into annuity pension schemes for tax reasons.” Moreover, it restricts the choice of retired people to invest in assets of higher returns. And then there is the Centre’s ridiculous proposal that the employer’s share of the contribution to the EPF cannot be withdrawn until employees turn 58. Suffice to say, keeping aside provident fund as strictly a retirement benefit is a luxury that not every salaried employee can afford, given their social and economic insecurities. It is something they bank on when there is an illness or a marriage in the family.  Under pressure from protesting trade unions, the Centre has thankfully cancelled a notification that tightened rules for the withdrawal of Employees’ Provident Fund (EPF) accumulations till the age of 58. The people have spoken and the government is obliged to listen.
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