The labour ministry, which had been kept in the dark over the imposition of taxes on provident fund (PF) withdrawals or the interest accrued, fears that there can be a large outflow from the Employees’ Provident Fund Organisation’s (EPFO) corpus of Rs 6.2 lakh crore before the proposed tax on withdrawals kicks in from April this year.
The EPFO, which falls under the jurisdiction of the labour ministry, came into being in 1952 under the jurisdiction of the labour ministry. The interest rate it pays every year to its subscribers is, however, decided by the finance ministry, even as the retirement fund body pays it from its income on investments.
Sources in the labour ministry said it was never consulted on the tax issue before it was announced in the Budget. Clearly aggrieved, they said much was not going to come to the government exchequer if only the interest part is taxed. The Employees’ Provident Fund (EPF) is a large source of cheaper funds for the government.
“A back-of-the-envelope calculation would suggest that the loss of interest income because of the fund outflow, and the interest income by way of taxing 60% of the interest income on withdrawals, could be significant,” a senior official said.
If the motive was to tax the Employees’ Pension Scheme (EPS) to bring it in parity with the National Pension System (NPS), there would not have been much furore, but taxing any component of the provident fund was bound to attract the wrath of retired people, who often use the fund for various obligatory purposes, like one’s daughter’s marriage or buying a home.
“The finance ministry has stirred a hornets’ nest with the proposal. A widespread protest is awaited and we are also bearing the consequences,” said a trade union leader.
However, the government would not require to amend the PFO Act to bring the proposals into effect, it would require to amend the Income Tax Act.