Right rollback

The Finance Minister’s suo motu rollback of the controversial Budget proposal to tax 60 per cent of withdrawals from the Employees’ Provident Fund (EPF), ahead of the Parliament budget debate, is welcome. The tax was retrograde, despite its objective of promoting the journey towards a pensioned society. For the sake of a marginal contribution to tax revenue, it would have extracted a disproportionate cost by whittling down the retirement kitty of the salariat. The manner in which finance ministry officials were tying themselves into knots to rationalise the proposal, post facto , clearly suggested it had not been well thought through.

None of the arguments advanced in favour of the tax stands up to scrutiny. The first, that it was intended to push retirees to buy annuity products with their retirement savings, which would otherwise be frittered away, smacks of unjustified paternalism. While it is desirable for governments to make room for salaried employees to be self-sufficient after retirement, it is not their business to micromanage how savers go about doing this. Why shouldn’t a retiree decide, based on needs and risk appetite, to invest his or her corpus in bank deposits, monthly income mutual funds or medical insurance in place of low-return annuities? The other contention that retirement savings are taxed globally on an Exempt-Exempt-Tax (EET) basis, stands on thin ground too. In a country that sorely lacks proper social security cover, the EPF is an extremely important nest egg for the middle-classes. In contrast, governments in the developed world fund myriad social security schemes ranging from unemployment benefits to State-sponsored healthcare. The EET argument is conceptually flawed as well; since the Finance Bill spoke of taxing “accumulated balances”, the tax would have resulted in an ETT regime. The third argument, that the EPFO was never intended as a retirement vehicle for employees earning above ₹15,000 a month, at least has a ring of plausibility. But given that 90 per cent of India’s workforce has no form of retirement savings, any move to shrink the existing EPF cover makes no sense. If an entire generation of Indians faces a pension shortfall 20 or 30 years hence, the problem would certainly come back to haunt policymakers.

If the real intent was to wean higher income earners away from the defined benefit EPF to the market-linked National Pension System (NPS), the Centre should achieve this by encouraging voluntary migration. Here, the decision to retain NPS tax breaks will help, as it now makes it more tax-efficient than before. But the key factors that hold back most savers from opting for the NPS are the complexity of the product, the difficulty of opening an account (most banks don’t promote it due to poor commissions) and the fact that most employers still offer the EPF as the default option. Dismantling these entry barriers may prove far more effective than tax tweaks, aimed at nudging the salariat towards a self-sufficient retirement.