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India should in a phased manner move to the exempt-exempt-tax (EET) method of taxation of savings, this year’s Economic Survey has suggested.
Under EET method, savings at contribution stage and also the accumulations are tax exempt while withdrawals are subjected to tax. For every savings instrument, there are three main stages — contribution, accumulation and withdrawals.
In India, most savings like public provident fund, employee provident fund are under Exempt-exempt-exempt (EEE) method while few such as National Pension system are under EET.
Making a case for savings to be taxed only at the point of ‘withdrawal’, the Survey has said the EET method is the best international practice on several counts.
The Survey has highlighted seven reasons to buttress the recommendation that savings should only be taxed under the EET method.
The suggestion to have EET method of taxation for savings is interesting, especially when Pension Fund Regulatory & Development Authority (PFRDA), pension regulator, is batting for EEE system of taxation for National Pension System (NPS) so as to grow pension sector in the country. Currently, NPS attracts EET method of taxation.
Meanwhile, the Economic Survey has also highlighted that small saving schemes “don’t always constrain pass through”.
This is in some contrast to the stance of many commentators who have been emphasising that monetary transmission is limited by high administered and small savings rates.
The argument was that banks worry that if they cut their deposit rates, customers will flee to small savings instruments. Recognising this, the Government had recently reduced rates on some small savings schemes to make them responsive for market conditions.
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