Govt. Withdraws Tax on Provident Fund With Immediate Effect

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STartup Tax Reduction

Ever since Finance Ministry decided to impose tax on provident fund withdrawal, there has been intense pressure on the Government to reconsider the decision. Every employee union across the nation, irrespective of their political inclination, had threatened massive strike if this tax on employee’s provident fund is implemented.

It seems that the pressure was too much to ignore for the Government, as they have decided to withdraw proposal to tax provident fund. Finance Minister Arun Jaitley informed the Parliament that the proposal to tax EPF (Employee Provident Fund) has been put on hold as of now.

In Parliament, he said, “The main argument is that employees should have choice of where to invest, idea is to make people join pension scheme,”

As we had shared in the past, Govt. wants employees to save for their future, and those who are retiring should invest in pension funds. The motive is clearly honest, but the way it was implemented made little sense as employees were indirectly ‘forced’ to invest in those schemes which Govt. wanted.

Minister Jaitley also said, “The policy objective is not to get more revenue but to encourage people to join the pension scheme”, adding that there can be “other measures” which can be equally effective.

In the budget speech last week, Govt. had proposed that 60% of the EPF withdrawal done by the employee shall be taxed. After huge uproar against this decision, PM Modi personally intervened, and asked FM Arun Jaitley to ‘reconsider’ the decision.

Today, PM Modi’s request was considered and the proposal to tax EPF withdrawal was withdrawn.

However, the decision to charge 40% of the withdrawal done under National Pension Scheme or NPS would remain unchanged. This was actually a good decision, as earlier, 100% of the money withdrawn under National Pension Scheme was taxed by the Government.

Will This Signal A Weak Government?

After the announcement to withdraw EPF tax came out, a certain section of financial media claimed that withdrawing this tax under pressure from salaried employees and unions would give a bad signal to the outer world.

Foreign investors may assume that it is a weak government at power, which can succumb to pressure which can derail the growth and development story.

These analysts argued that the proposal to tax EPF was applied only to 60 lakh out of 3.7 crore employees who contribute to EPF on an annual basis; which is 16% of all employees. Considering that only those employees who are earning more than Rs 15,000 were proposed to be taxed, it would have added to Govt.’s tax collection, and helped the poorer section indirectly.

We will keep you updated as more details come in.

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