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DAILY NEWS ANALYSIS

  • 26 March, 2021

  • 5 Min Read

Modified tax system

Modified tax system

Introduction

  • This article analyses the amendments brought to the Finance Bill 2021 regarding taxation matters
  • Finance Minister has steered through Parliament the Finance Bill of 2021, which includes 127 amendments.

Issues with the Rs.2.5 lac per year limit

  • Responding to MPs’ concerns on the tax, she said that nearly 93% PF account holders will be covered by the ?2.5 lakh per year limit, while a mere 1% were abusing the system.
  • Yet, she introduced an amendment doubling the threshold for annual PF contributions to ?5 lakh, only for employees whose employers do not remit any contribution to their retirement fund account.
  • For the crores of Employees’ PF account holders in the private sector, this ?5 lakh threshold is a non-starter as an employer-employee relationship is an implicit requirement to open an EPF account.
  • While employees may voluntarily enhance contributions beyond the statutory wage limit of ?15,000 a month and employers are not bound to match enhanced contributions, a ‘zero employer contribution’ scenario is not possible for EPF members.
  • This suggests that only some senior government staff who joined service before 2004 and are not part of the NPS will benefit from this concession, as they contribute to the GPF account and get a defined benefit pension separately.
  • In a country with a large informal workforce and sparse social security systems, reasonable savings for retirement should not be penalised.

Increasing the cap can be a solution

  • The least the government could have done was to offer the same cap of ?5 lakh to EPF members, by including their employer contributions during the year.
  • As things stand now, annual investments into the PPF that anyone can open, are capped at ?1.5 lakh.
  • Similarly, employee PF contributions beyond ?1.5 lakh are not tax-deductible under Section 80C of the I-T Act, but income on such contributions beyond ?2.5 lakh will be taxable and employer contributions into the EPF, NPS or any superannuation pension fund are capped at ?7.5 lakh.
  • And the income on GPF contributions up to ?5 lakh would be tax-free.

Way ahead

  • To top this off, the new Wages Code will compel employers to pay higher EPF contributions by linking them to at least half of their total pay on a cost to company basis, rather than 24% of basic pay presently.
  • This will virtually force many EPF members into contributing over ?2.5 lakh a year.
  • This either reflects a lack of system-wide thinking, with two arms of the government working at cross purposes, or an ingenious ploy to stir up tax collections.
  • With doubts on the implementation of this new tax yet to be addressed, the government must consider putting it on hold and think through its implications.

Source: TH


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