The Hindu Business Line : Unfair move

THERE ARE REPORTS that the Government intends to tax any withdrawals from the provident fund by members with large sums to their credit. These might well be just one of those inspired official leaks or an educated guess that may eventually find no place in the Budget. But even from a purely academic standpoint, it is clear that the proposal is fraught with both legal and public policy challenges that suggest the Government would be better off avoiding such a course.

The concept of a provident fund is to provide for a post-retirement future, so that the individual in question is able to live a life of dignity consistent with the standard of living to which he/she has been accustomed during the productive years. Implicit in this is the belief that the State should be concerned with the quality of life of a retiring individual who has contributed to the economy of the nation. Global practices suggest that this is indeed a desirable dimension of public policy. Equally, there is no serious argument with the notion that only a standard of living close to the one enjoyed during one's working life would lend dignity to one's existence. In the event, it is reasonable to presume that the percentage of salary the state has mandated for the employee and the employer to set aside towards this has been arrived at after taking into account the tax structure for such contributions. If the tax regime for such contributions is going to be changed, it follows that the percentage of salary to be set aside should also be revised upwards. Now, the Government would be hard put to it to ensure this as it would impose an added burden on both employers and employees — for the former, in terms of higher wage costs, and the latter, a further tightening of the belt on current consumption.

If withdrawals are to be taxed, it can only be on that portion of an employee's accruals that is contributed by the employer. The employee's contribution has already suffered taxation by virtue of it being included in his `total income', from which the deduction has been made, and any attempt to bring it to taxation at the time of its eventual withdrawal would be tantamount to subjecting the same income to taxation twice. Now a proposal to tax withdrawals of accumulations pertaining to employers' contributions would also require modifications to the present tax structure on the pensions public servants get in lieu of Government's contribution to the provident fund. The commuted value of such future pension payments is currently exempt from taxation, which would have to be suitably modified, as it is, in effect, a disguised form of employer contribution to provident fund. It would be grossly unfair to let such a payment in the hands of, say, the top-most civil servant in the country, escape taxation while subjecting the retirement benefit of an average blue-collar worker in a private sector enterprise to the same. Taking the proposal to its logical conclusion, the entire tax edifice of superannuation schemes, with its feature of exempting the commuted value of a portion of annuities from taxation too, should be modified. In the event, the Government would be adopting an overly ambitious agenda of revamping the tax structure, which would tax its political will to the extreme.

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