The Hindu Business Line : EET: An exercise in pettifogging

THE Expert Committee appointed by the Finance Ministry to give shape to the Budget proposal to usher in a regime of exempt-exempt-tax (EET) with respect tax-benefiting savings, seems to be veering round to the view that bygones should be bygones. From the contours of its thinking made available to the media, it seems it would recommend imposition of tax on withdrawals made from tax-benefiting savings only in respect of contributions made to the schemes after March 31, 2006. This recommendation the committee, perhaps, hopes would pre-empt and ward off judicial challenge to the ensuing move given the fact that courts, including the Supreme Court, have repeatedly frowned upon retrospectivity in legislation, especially fiscal legislation that has the effect of increasing the financial burden of the assessee. While this deference to judiciary is welcome and indeed a small mercy to the investors who are already with the various schemes, the moot question is whether the EET should there be at all. The Kelkar Committee, while making a pitch for it, was, if one may say so, more swayed by the desire to be seen in the company of Joneses than by the almost unique Indian realities as it ought to have.

In the West, the degree of tax compliance is very high, with the UK reporting payment of tax by 30 per cent of its population and the US reporting a still higher percentage — 50 or thereabouts. In such a milieu of all-round tax compliance, the EET cannot be resented by anybody. But things are different in India where tax evasion is endemic, with the government unable to crack the whip at the evaders more out of inertia than anything else. In such a milieu, the taxpaying public is bound to resent the EET. They are bound to wonder, for example, why the small concession by way of tax reprieve for legitimate savings designed to bankroll government welfare schemes and infrastructure projects should be subsequently wrenched away when millions are cocking a snook at the government and not paying any tax at all.

They are also apt to wonder why, for example, a government, which indulges investors in the share market with an apology of tax called Securities Transaction Tax that is a piffling compared to the severe dose of tax on hard-earned income, should resent a small tax waiver savoured by them.

The Government ought to get tough with the hard-to-tax categories and those handled with velvet gloves than with the ones who are already bearing the brunt. The EET would, in addition, be counterproductive in the sense that it would dampen the enthusiasm to save. India's savings rate continues to languish at the same 23-24 per cent levels, whereas China reports an envious 40 per cent. Any savings funnelled into government coffers should be lapped up like manna from heaven.

The ridiculously low lock-in period for tax-savings bonds — three years — can by all means be easily upped to eight or even ten years. But for the time being, the Government should put the EET in cold storage. And, for once, for a good cause.

In addition to objections on grounds of principles, there are administrative imponderables too. For example, a youngster opening a PPF account after March 31, 2006, will have to preserve all the income-tax returns and assessment orders, if any, for the next 15 years given the fact that the lock-in period of a PPF scheme is 15 years at the end of which his withdrawals from the scheme would be taxed because it is not always necessary that there is a one-to-one relationship between the amount deposited and the tax benefit utilised. He might have used the limit of Rs 70,000 to the hilt though he needed only, say, Rs 50,000 out of this as deduction from his GTI.

The bank with which the PPF account has been operated all these years would of course deduct tax at source on the entire amount of withdrawal, thus necessitating frenetic and numerous visits to the I-T Department by this person to obtain refund of the excess tax deducted.

The tax administration is hardly geared to meet such challenges if the postponement by one full year of the need to submit TDS certificates by assessees is any indication.

Moreover, taxing the entire withdrawal just in one year would give rise to what is felicitously referred to as `bunching effect' by economists and tax experts. The Government, which has in the past empathised with earners of long-term capital gains and showered numerous sops to neutralise the bunching effect that long-term capital gains inevitably entails, should in all fairness be more alive to this danger in the context of the EET.

Will the tax rate be a special low flat rate? Will the cost-inflation index be pressed into service for their benefit also as has been done for the earners of long-term capital gains to neutralise the contribution of inflation to the seemingly astounding appreciations one is witness to?

Will they also be allowed to roll over the withdrawals on the same liberal terms as earners of long-term capital gains are, like being allowed to park the income in the bonds of Nabard, and so on, with as little as a three-year lock-in period?

(The author is a Delhi-based chartered accountant.)