While the Modi government is allaying perceptions of tax terrorism among foreign investors and projecting a pro-poor stand to counter opposition allegations, a peculiar clause in the Finance Bill can undo its efforts as it brings the retirement savings of millions of workers under the income tax net, even if they earn as little as Rs 2,120 a month.
To put that in perspective, the annual income threshold above which personal income tax is payable is Rs 2.5 lakh or about Rs 21,000 per month.
From June 1, workers' retirement savings exceeding Rs 30,000 will be taxed at 10.3% or the maximum marginal rate of 30.6% if they leave the employees' provident fund before completing five years of service.
Tax will be deducted at the highest rate from the provident fund account balances of such employees who don't have a PAN card, used to identify taxpayers, according to the new Section 192A introduced in the Income Tax Act. Even those with a PAN card who save a higher amount and pay income tax will need to refile their past tax returns where deductions were claimed against EPF contributions.
Alarmed officials in the PF office said that 90% of the Employees' Provident Fund Organisation's 8.5 crore-plus members don't have PAN cards and would end up paying an "exorbitant and unfair" tax on their savings. The EPFO board chaired by labour and employment minister Bandaru Dattatreya took up the issue with the finance ministry last month.
However, officials said there is no move yet to reconsider the issue, in contrast to the alacrity with which the finance ministry announced a review of new I-T return forms that sought details of foreign travel and attracted severe flak.
"A vast majority of EPF members may not have a PAN card. The charging of income tax in respect of such members at the maximum marginal rate will be exorbitant and unfair," Central Provident Fund Commissioner KK Jalan noted in a missive to the labour ministry on the issue last month.
Drawing a parallel between another provision in the Finance Bill that makes quoting of PAN necessary for purchasing jewellery over Rs 1 lakh, the PF department has asked for 'the same logic' to be applied to EPF members so that workers are not subject to unnecessary hassles.
An EPF account is mandatory for all employees earning up to Rs 15,000 per month (raised recently from Rs 6,500 per month) in firms employing over 20 workers. As per the law, 24% of an employee's salary is diverted to her or his PF account as a social security net for old age.
The Rs 30,000 threshold set in the Finance Bill for deducting tax from the PF balance implies that tax would be payable on contributions of as little as Rs 508 to the EPF every month for up to 59 months. The retirement savings of those earning over Rs 2,120 a month could be taxed at 30.9% if they don't have a PAN card.
"The EPFO provides social security to employees who are mainly from the lower income strata of the society. In majority of the cases, the yearly income of these employees would be less than the exemption limit prescribed in the Income Tax Act and therefore, may not be required to pay tax at all," Jalan pointed out, adding that the Rs 30,000 tax-free limit on such PF balances is 'too low'.
Unlike banks that deduct income tax at 10.3% on interest income of over Rs 10,000 earned from fixed deposits, the provisions for taxing PF accounts envisage taxing the principal amount (EPF contributions) as well as the interest earned (annual dividend credits). In cases where a depositor hasn't shared his PAN card details with the bank; such interest income is taxed at 20.6%.
In contrast, the finance ministry has asked the EPFO to levy the highest possible tax rate for those who don't hold PAN cards, if their accumulated PF savings are Rs 30,000 or more. Once tax is deducted from those who don't have a PAN card, they are required to submit different forms to the income tax department (Forms 15G, 15H and 60).
"Filling such forms would add to woes of EPF subscribers and more so when it is the avowed policy of the present government to move towards an era of paperless offices," Jalan wrote in his letter to Labour Secretary Shankar Aggarwal, pleading for the matter to be taken up with the finance ministry, "keeping in view the financial interests" of workers.
Source: Economics Times