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Thursday, 21 April 2016 03:59
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As with annuity plan, curbing withdrawal was unfair


After being forced to retreat on its taxation plan in the budget for EPFO withdrawals—40% would be tax-free but the balance would be taxed unless it was invested in annuities—the government has suffered its second setback in as many months. After a violent protest against it, the government has retreated on the proposal to restrict the premature withdrawal of the employers’ contribution to the provident fund. The two missteps come from not thinking through the issue clearly. One, as our columnist Manish Sabharwal points out, the imposts on account of EPFO and ESI add up to around 45% of a person’s salary at the lower end of the income scale—if people find half of their salaries channelled into forced savings, they are going to protest if they can’t take it out when they need it. More so since these two institutions deliver poor value for money—at 3.5% of the monthly contribution, the EPFO’s charges make it the world’s most expensive mutual fund since, in any case, it is mostly investing in government securities and provides a return much lower than that in the New Pension Scheme (NPS). Two, the distinction between employers’ and employees’ contribution is incorrect since even the former is part of the salary—in that sense, all the contribution is that of the employee.

The government’s reason for trying to curb premature withdrawals is based on its desire that people have a healthy corpus for their retirement. Apart from the fact that the mandatory impost—24% for EPFO—needs to be lowered, surely the more sensible solution would be to say that people lose part of the tax benefit they get in case of a premature withdrawal—as in the case of forcing people to buy annuities, the government was seen as playing the heavy in this case as well. Also, the taxation for premature withdrawal should not apply to those below a certain income level. Right now, the employer’s contribution is tax-free while the employee’s contribution is tax-free up to the R150,000 annual ceiling under Section 80C which covers other investments. Also, employees have to be free to move out of the EPFO to the NPS. And if the government wants to ensure that people have a healthy pension after they retire, this cannot be done on the cheap by forcing people to invest more when they are earning—it has to be restricted to those with low-incomes and it has to be done directly by the government making annual contributions to a pension fund for these people. Since funding that isn’t going to be cheap, it means rethinking the waste on annual subsidies and channelising that towards genuine old-age security while improving the environment for greater jobs creation for citizens during their working years.


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