Budget 2016 : Why Government is Wrong in Taxing EPF

  The government would do well to withdraw the ill-thought-through move to tax withdrawals from the Employees' Provident Fund (EPF) and be content with initiating a wide-ranging debate on the subject for now.

The best way to tax savings is indeed to exempt them at the time of contribution, exempt them at the time of accumulation and tax them at the time of withdrawal. Withdrawal would refer to that part of the matured saving that is not ploughed back into another saving product. The government might think it is precisely such a rational tax treatment it is bringing to bear on EPF, but it is grossly mistaken.

Taxation has to be equitable. When rich traders and professionals get away without paying tax and the tax base remains constricted, squeezing the salaried employee ever more to raise additional revenue is the opposite of equitable.

The exempt-exempt-tax (EET) regime can be palatable only when the tax base is wide, the rate of tax is significantly lower than what it is today and the highest marginal rate kicks in only at an appreciably higher income threshold.

Then again, the insistence that 60% of retirement savings would qualify to be tax-exempt only if invested in annuities has no rational basis. It could well be that the retiree is better off investing the money in, say, a house or a shop that would offer a steady return and also, more importantly, from the point of view of Indian tradition, allow his family to draw immediate benefit from the retirement saving of the family elder.

Is it minimum government for the state to decide how much of retirement savings should be reinvested and then decide the specific instruments in which the reinvested amount be deployed?
A new tax regime for retirement savings should kick in for those who are beginning to save for their retirement and have the option of planning their savings in the knowledge that a portion of their retirement corpus could be taxed. This is what was done for those who joined the National Pension System (NPS). Start a discussion on how to achieve tax parity for EPF and NPS members. Act later, based on a broader understanding of the subject.

MUMBAI: Professionals obtaining any sum of money under a

non-compete

agreement will now be subject to tax with the government having plugged a loophole in the Budget.

Once non-compete agreements were largely restricted to the manufacturing arena.For instance, an outgoing employee would have to sign on the dotted line that he would not share knowhow or a patent that he had helped develop during his employment. Or if he was an inventor, he could be debarred under the non-compete agreement from starting a similar line of business for a certain period. The money received under such non-compete agreements was duly taxed.

"There was no specific provisions to cover professionals who could argue that the sum of money received by him under a non-compete agreement was not taxable," says Gautam Nayak, tax part ner, CNK & Associates.

Now a wide gamut of pro essionals -such as those in he legal, medical, enginee ring or architectural profes sion, or engaged in accoun ancy , consultancy and inte rior decoration, to name a few -have no escape from paying their tax dues when they receive money under a non-compete agreement.
The nature of the tax will be based on the nuances of the agreement. The money received could be taxed either as a capital gain or as income from business or profession. Nayak illustrates: "If a managing partner in a consultancy transfers the right to carry on the firm in its existing name, the sum of money received by him would be a capital gain, subject to a lower rate of tax, assuming the managing partner falls in a higher tax bracket. But if the managing partner decides not to set up a competing consultancy business for a certain period of time, say three years, then the sum of money received under the non-compete agreement will be treated as income from business or profession and taxed at the applicab le income tax rates."

One of the most significant developments in the transfer pricing arena contained in the Finance Bill, 2016 is the introduction of Country-by-Country Reporting (CBCR) norms for the purpose of transfer pricing documentation.

"The new requirement comes into being from April 1, 2016 (financial year 2016-17) for Indian parent companies having consolidated turnover in excess of 750 million euros (or Rs 5,395 crore at current exchange rate). India's transfer pricing authorities will also be able to access CBCR documentation of parent companies, outside India, which have subsidiaries in India, via the mutual exchange of information agreements," explains Sanjay Tolia, partner, PwC.

Typically , the CBCR do cumentation requires reporting various details for each country where business operations are carried out by a company , such as amount of revenues, profit before tax, income paid and accrued, number of employees, assets, and details of activities carried out in each country . CBCR documentation will give Indian tax authorities a global picture of the operations of an Indian-headquartered company and of multinational companies having business in India, and deter mine whether appropriate profits are apportioned to the business operations carried out in India.
Indian-headquartered companies having interna tional operations will need to file CBCR documentation reports for the FY2016-17, before the due date of filing of the tax return, which is November 30, 2017. A graded stiff penalty structure has been prescribed for various noncompliances (see table).

"While CBCR is expected to bring in increased transparency , it is likely to increase compliance burden significantly. Transfer pricing authorities would want to have updated information at least on a yearly basis," says Hitesh Gajaria, chartered accountant and transfer pricing specialist.
"An Indian company , whose parent is resident of a country which is perceived as not co-operating with India for exchange of information, say Cyprus, will find it tougher. The Indian company may not have all the relevant information pertaining to its foreign parent and non-filing of the CBCR will result in a daily penalty ," adds Gajaria.

The Budget presented on Monday has come under fire for the move to tax

EPF

but there's one proposal that is sure to bring cheer to small businesses and professionals, and that's the presumptive tax scheme.

This scheme covers small businesses with gross turnover up to Rs 2 crore — up from the existing ceiling of Rs 1 crore. It has also been extended to professionals with gross income up to Rs 50 lakh. So what exactly is presumptive taxation? As per Section 44AA of the Income-tax Act, 1961, a person engaged in business is required to maintain regular books of account. However, a person adopting the presumptive taxation scheme can declare income at a prescribed rate of 8% and, in turn, is relieved from the tedious job of maintaining books of account.

However, in case income earned is at a rate higher than 8%, then the higher rate can be declared.
And with the inclusion of professionals, a new Section 44ADA is proposed to be inserted in the Act to provide for estimating the income of an assessed who is engaged in any profession referred to in sub-section (1) of Section 44AA such as legal, medical, engineering, architecture, accountancy, technical consultancy, interior decoration or any other profession as is notified by the board in the official gazette and whose total gross receipts does not exceed Rs 50 lakh in the previous year. For the purpose, 50% of the total receipts of the professional during the financial year will be considered as profit and get taxed under the income-tax head "profits and gains of business or profession".

If you look at the table, it's clear that the assessee not only saves on record-keeping headaches, he also saves a considerable amount in taxes. Yes, there can be a few counters to this — mainly that the taxable income could be much below the presumptive taxation rate of 8% and 50% of receipts respectively. And if that is the case then the individual has no option but to maintain the books of accounts.

To further keep the compliance burden minimum, those using presumptive taxation scheme are also allowed to pay advance tax by March 15 of the financial year, as against the normal practice of paying the advance tax in four installments.

However, the taxpayer needs to be careful when opting for this as he or she has to remain in that scheme for 5 years to avail the benefits.

The writer is a certified financial planner

MUMBAI: Salaried individuals, many of whom opted to save through additional contribution to their voluntary provident fund (VPF), could now shift to tax-free bonds or debt mutual funds.

This is after the government in the Union Budget proposed to tax 60% of an individual's provident fund corpus at the time of withdrawal on retirement. This is applicable for provident fund contributions made post April 1, 2016 unless it is invested in annuities.

"Contribution to voluntary provident fund will be considered a part of the provident fund corpus and will be taxed accordingly," said Manoj Nagpal, CEO, Outlook Asia Capital, a financial advisory firm.
Employees' Provident Fund (EPF) is a retirement benefit scheme available to all salaried employees. When you start working, you and your employer both contribute 12% of the basic salary (plus dearness allowances, if any) to your EPF account.

VPF is an option available to salaried employees where they can go beyond 12% of their basic salary and dearness allowance that go into the Employees' Provident Fund (EPF) account every month.
Given the ease of operation, riskfree status, lucrative interest rates and their tax-free feature, many employees use this to add to their provident fund savings.

Now, with 60% of the provident fund corpus taxable on withdrawal for an employee in the 30% tax bracket, the effective tax will be 18%. "This will bring down the returns from VPF to 6-7% assuming current interest rates continue," said Nagpal.

This could encourage individual investors shifting to tax-free bonds or debt mutual funds, which currently offer higher returns. For example, the recent tax-free bonds offered interest rates in the range of 7.25-7.7% for retail individual investors, liquid funds as a category have given returns of 7.91% over the last one year as per data from Value Research.

"With the VPF no longer lucrative, employees could choose a debt or an equity fund, based on their risk appetite," says Amol Joshi, founder, Planrupee, a Mumbaibased financial planner. There are limited options when it comes to choosing amongst annuities and monthly payments from annuities are taxable, thereby making it a non-lucrative option.

NEW DELHI: Facing a torrent of criticism over the Budget proposal to tax part of the Employees' Provident Fund, the government sought to take some of the sting out of its move, saying that it would only affect top salary earners and defending the step as a measure to create a pensioned society.

A press release issued by the government indicated there would be no rollback. However, it left itself some wriggle room by saying all the suggestions that have been made will be considered.

On the other hand, a senior ministry official said tax wouldn't be levied on 60% of the corpus, as stated in the Budget and reiterated in the press release, but on the interest accrued.

He also added that there would be no cap of Rs 1.5 lakh on the employer's contribution as had been proposed by Finance Minister Arun Jaitley in his Budget on Monday.

"Only the interest component will be liable to tax," the official told ET.

There is no change in the status of Public Provident Fund ( PPF), which will continue to enjoy the 'EEE' or 'exempt, exempt, exempt' status at the stages of investment, accumulation and withdrawal.
"We have noted concerns about changes in tax treatment for EPF/PPF/NPS (National Pension Scheme)," Minister of State for Finance Jayant Sinha had said in a tweet earlier in the day before the government issued its clarification.
The government said it's considering representations it has received and Jaitley will respond to them in his reply on the Finance Bill.

"We have received representations today from various sections suggesting that if the amount of 60% of corpus is not invested in the annuity products, the tax should be levied only on accumulated returns on the corpus and not on the contributed amount," the ministry said.
"We have also received representations asking for not having any monetary limit on the employer contribution under EPF, because such a limit is not there in NPS. Finance minister would be considering all these suggestions and taking a view on it in due course."

The Budget proposal had been regarded by many as undermining the retirement prospects of salaried employees but the official cited above said the reasoning behind the move had nothing to do with resource mobilisation.

"We want people to move towards a pension," the official said. For those with a monthly salary in excess of Rs 15,000, the Budget said that 40% of the EPF corpus could be withdrawn tax-free but that the rest would be liable to tax unless it was invested in buying an annuity.

Low earners won't be hit In the press release, which restated the Budget position, the finance ministry said the new provision will not affect 3 crore EPF subscribers having a monthly income less than Rs 15,000, who will continue to enjoy 100% exemption on withdrawals. It said the EPF scheme had been set up to cater to such wage earners.

"Out of around 3.7 crore contributing members of EPFO as on today, around 3 crore subscribers are in this category. For this category of people, there is not going to be any change in the new dispensation," it said.

It said about 60 lakh contributing members who have voluntarily accepted EPF are highly paid private sector employees. The changes will apply to these people, according to the press statement.
"What we are saying is that such employee can withdraw without tax liability provided he contributes 60% in annuity product so that pension security can be created for him according to his earning level," it said. "So what it means is that the entire corpus will be tax-free, if invested in annuity."
The Economic Survey presented before the Budget had alluded to the rich taking advantage of tax exemptions meant for those not so well-off.