What I Think The Govt. Needs To Keep In Mind While Imposing Taxes In The Future

Posted on March 10, 2016 in Business and Economy, Society

By Mahesh Kulkarni:

India's Finance Minister Arun Jaitley arrives at the parliament to present the federal budget for the 2016/17 fiscal year, in New Delhi, India, February 29, 2016. REUTERS/Adnan Abidi TPX IMAGES OF THE DAY - RTS8H1D
Image credit: Reuters/Adnan Abidi.

An English peer’s epitaph read:

“What I Gave, I have,
What I Spent, I had,
What I Left, I lost”

Mr. Nani Palkhiwala used to say that governments tax you no matter which of the three options you choose. An American IRS Commissioner once said that the difference between a taxidermist and a tax collector is that the taxidermist, at least, lives the hide.

The current dispensation seemed to be no different than the ones envisaged in the preceding paragraph. But then, giving into a public uproar against the proposal to tax EPF (employee’s provident fund) at the time of withdrawal, the government has withdrawn the proposal.

Now, savings in your EPF account still enjoy the EEE status, i.e., exempt, exempt, exempt status. What does this mean? It means that the part of your salary you save in Employee’s Provident Fund is exempt from income tax upto the extent of rebate available in Section 80C of the Income Tax Act which is now Rs. 150000. The interest accrued on this amount is also exempt from tax and the final amount you receive at the time of your retirement is also exempt from taxation. It is this last part that the government wanted to tax. To be more specific, it wanted to tax 60 percent of withdrawal if you do not invest it in annuity scheme.

I would like to utilise this opportunity to throw some light on objectives of taxation. Governments levy taxes to achieve one of or any combination of following objectives:

1) Raise revenue to meet expenditure.
2) Bring about a certain kind of social or economic equality.
3) Dissuade consumption of certain types of goods or services.

“Pension schemes offer financial protection to senior citizens. I believe that the tax treatment should be uniform for defined benefit and defined contribution pension plans. I propose to make withdrawal up to 40% of the corpus at the time of retirement tax exempt in the case of National Pension Scheme. In case of superannuation funds and recognised provident funds, including EPF, the same norm of 40% of corpus to be tax free will apply in respect of corpus created out of contributions made after 1.4.2016.” This statement in the Union Budget Speech by Arun Jaitley presented on the 29th of February created a lot of confusion and drew much flak from the general public.

While it is necessary for the government to tax people so that it can raise revenue for its various activities, it would be prudent if the taxation policy adheres to the four canons proposed by Adam Smith in his book ‘The Wealth of Nations’.

1) Equity: Taxes should be equitable between different classes in society. The proposal to tax 60% of EPF (employer’s contribution plus employee contribution plus the interest accrued) at the time of withdrawal violated this canon. Generally, private sector employees, especially the salaried middle class and the lower middle class, save provident fund over the period of their service so that they can make use of the amount accumulated for meeting high-ticket expenses like children’s marriage or buying a house or renovating their house etc. at the time of withdrawal.

2) Convenience: The taxpayer should have convenient methods of paying tax. The said proposal cannot be said to violate this canon.

3) Economy: The amount spent on collecting the tax should be substantially lower than the tax collected. Since the amount on which the tax was to be levied was likely to be substantial, this canon is also unlikely to be violated.

4) Clarity: The taxpayer should be fully apprised of the purpose, method and other details with regard to the tax. As per the proposal, the withdrawal amount is not taxable if it is invested in an annuity plan. But, this is nowhere mentioned in the Finance Minister’s speech. The proposal clearly penalises the thrift of small savers and there was no clarity on what type of annuity one can invest in.

Giving in to public opinion and the apprehension voiced by the Ministry of Labour and Employment, which is the custodian of EPF, the Finance Minister has agreed to reconsider this particular proposal.

Now, the Finance Minister has given the following statement in Lok Sabha: “In view of the representation received, the government would like to do a comprehensive review of this proposal and therefore I withdraw this proposal…”

His statement is quite telling. If, as he himself has agreed, the proposal is withdrawn because the government wants to do a comprehensive review of this proposal, it means that the proposal was introduced in the budget without doing a comprehensive review. To tax is a sovereign right. And like all sovereign rights it would be an abuse if the exercise of this right were not premised on the sound foundation of economic rationale.

But, one positive out of the entire episode is the diligence shown by the media, especially by people on social media, in shaping the discourse and compelling the government to take notice of their concerns and ultimately mend its ways. At the expense of sounding clichéd, I would like to say that eternal vigilance is the price of democracy.