The announcement by Finance Minister Arun Jaitley during his Budget Speech to tax withdrawals from Employee Provident Fund (EPF) as well as to tighten the rules for its withdrawal ignited protests by trade unions and created anxiety amongst crores of salaried employees. In the wake of violent protests from trade unions, the government was forced to rollback both the amended provisions of the EPF.
As a welfare state, the government has the responsibility of providing income and health security. Over the years, EPF has expanded significantly and been instrumental in bringing individuals within the social security net. The EPF has provided 3.7 crore subscribers a platform to save and invest in a risk-free manner, assuring them and their dependents a secure future.
Since its introduction, the EPF has largely been a tax-free savings vehicle. Being exempt from tax at the stage of deduction, deposit of salary, annual earnings and payout, the EPF is popularly termed as an EEE (exempt-exempt-exempt) scheme. The announcement to tax 60% of the provident fund withdrawal from April 1 came as a rude shock to lakhs of individuals. It aimed to convert the EPF into an EET (exempt-exempt-tax) Scheme from an EEE Scheme. Altering a norm in practice since 1952, the government was suddenly taking away a huge portion of subscribers' lump sum retirement benefit.
The announcement further restricted the withdrawal of the entire corpus of EPF till the age of 58. EPF subscribers were now restricted to withdrawing only what they (the employees) - and not the employers - had contributed, limiting their access to their own savings in the case of unemployment, and raising the retirement age from 55 to 58 years. It is unfair to assume that the employer's contribution is not savings of the employees. It is earned in lieu of dedication and hard work. While the EPF is intended to be a long-term saving vehicle, should the prerogative to withdraw EPF savings rest with the government or with the owner of the funds?
Contrary to popular belief, the entire employer's monthly contribution does not go into an employee's EPF account. Most of the employer's contribution is diverted, leaving a residue of only 2% of the 12% contribution.
Early withdrawals in EPF have always been allowed in the special context of the social and economic reality of the low-income Indian working class. The cultural ethos requires the breadwinner of the family to pay for a variety of family obligations - both social and customary - and including for the extended family.
Due to early withdrawals, the average payout amount at the time of retirement for as many as 80% of blue-collar workers is a meager Rs 2,500. Restricting early withdrawals will lead to acute distress and will drive poor workers to money lenders for meeting unavoidable family needs and obligations.
The last two and a half decades have seen enormous labour market mobility. Massive contractualization of labour has taken place. Even executives and media persons are now contract labour. They are largely excluded from all income protection, health protection and labour protection schemes for workers.
In complete absence of universal old-age income and health protection schemes, income transfers by workers to their homes has been the sole income security for the elderly and infirm. Reducing this capacity through the proposed changes to withdrawal was an unkind cut. These income transfers have helped to rectify the shortcomings of inefficient tax financed pension schemes. To take away this financial support from the hands of the poor workers is not in public interest.
The Prime Minister and the intended policy statement of the government have been talking of doubling household incomes in rural India and expanding employment. Even the very insecure contract employment growth is not visible. This is the worst time to shave off a large component of the savings of poor workers and contract labour.
The reason for these drastic changes has been pinned to bringing parity between the National Pension Scheme (NPS) and the EPF. The government believes that this would push individuals towards pension security available throughout retirement rather than a lump sum withdrawal at the time of retirement. Perhaps the government should have considered extending EPF tax benefits to NPS in an effort to expand enrollment. Rather than forcing people to change their preferences, providing them with the freedom of choice will encourage better decisions and benefits.
Making EPF taxable and unattractive is bound to drive salaried employees to schemes such as the NPS. It exposes people to market risks and the volatilities of the stock market. The NPS for one allows for investment in equity-related schemes and the stock market. The government must realize that several individuals may not be comfortable with exposing their hard-earned savings to risks.
In EPF, there is a sharing of risk between the member, the fund manager and the government. In NPS, all the risk has been transferred to the member, with the government and the fund-manager going scot free - a very unfair arrangement. Worse when seen in the context of the fact that all the investments are at the disposal of the government as non-tax receipts through debt instruments or as a means to support the development of the capital market in furtherance of fiscal policy.
Publicly-managed pension systems have an administrative cost lower than 2%. It is privately-run systems like NPS - based on the Chilean model - that run up administrative costs of about 24%. The reason is front-loading and the repetitive high administrative cost of maintaining and servicing individual pension accounts for each member. Added to this is the huge cost of buying an annuity plan - nearly 10 to 12% in India.
The government must instead focus its energy on plugging the inefficiencies of the EPF. The EPF is yet to make mobility of salaried employees easier. Employment change results in a change in EPF number and accounts are not consolidated. This has led to a large number of accounts being inoperative.
The answer is registering employees directly by EPF and ensuring "one number-one employee". The ongoing program to do this was stopped mid-stream in 2004 by the Congress Labour Minister Sis Ram Ola with no reason assigned. The NDA Government must leverage the Aadhaar scheme to make the working of EPF more efficient and effective.
The nation-wide protests by labour unions against the proposed changes by the government certify that the decision was taken in isolation. Labour unions are the voice of crores of employees and therefore policy decisions about EPF cannot be made without taking them into consultation. Even the March 18 notification of the Finance Ministry to divert unclaimed savings in EPF, Public Provident Funds and other small saving schemes to finance a Senior Citizens' Welfare Fund has received flak from trade unions. It has also been deemed unconstitutional as it contravenes the provisions of the EPF Scheme, 1952.
The government must refrain from announcing policy measures which do not reflect the interests of the people. Indian salaried employees save to give to their children. By contributing to the EPF, crores of salaried employees have vested their trust in the government to protect not just their years of hard work but also their future. Such hasty and myopic policy recommendations will only breed discontent towards the government.
(Kalikesh Narayan Singh Deo is a second-time sitting Member of Parliament from Bolangir in Odisha and a prominent leader of the Biju Janata Dal.)Disclaimer: The opinions expressed within this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of NDTV and NDTV does not assume any responsibility or liability for the same.