Labour Ministry opposes taxing PF withdrawals

Labour Ministry on Monday expressed its reservations on the Direct Tax Code's proposal to tax all savings and provident fund schemes at the time of withdrawal.

"We are among those countries which are spending very meager amount on social security benefits. Therefore taxing the existing retirement benefits schemes would affect the working class," Minister of State for Labour and Employment Harish Rawat told PTI.

"We have made our stand very clear to the Finance Ministry in a letter sent some time ago. I hope that retirement benefits schemes like Employees' Provident Fund would not be taxed at the time of withdrawals as proposed under the new Direct Tax Code," the Minister added.

In the communication to the Finance Ministry, the Labour Ministry had said, "making any attempt to de-incentivise (PF) deposits by withdrawing the preferential tax treatment would have negative impact on continuation of social security coverage to productive workforce."

The Empolyees' Provident Fund Orgranisation (EPFO), the latter added, "would be getting adverse impact on running these (retirement) schemes on account of withdrawal of tax incentives under the proposed Exempt-Exempt-Tax mode (EET)".

The draft Direct Tax Code, on which the government has invited comments from the public, proposed to bring all the savings scheme under the EET mode of taxation, which means that a subscriber would be required to pay tax at the time of the withdrawal.

At present, on popular savings schemes like General Provident Fund (GPF) and Public Provident Fund (PPF), no tax is levied either at the time of contribution, accrual of interest, or withdrawal of funds by subscribers.

As per the DTC proposal, the EET mode would cover retirement funds, including GPF, PPF, Recognised Provident Fund and Employees' Provident Fund.

The Labour Ministry, referring to the three superannuation schemes being run by the EPFO, said, "as all three schemes are social security schemes, the present tax treatment has been very supportive to the social security by incentivising saving to these funds."

The three schemes being operated by the EPFO, a body under the Labour Ministry, are Provident Fund Scheme, Pension Fund under Employees Pension Scheme 1995 and Insurance Fund under the Employees' Deposit Linked Insurance Scheme 1976 as mandated under the Employees Provident Fund Miscellaneous Provisions Act 1952.

Earlier, trade union federation Hind Mazdoor Sabha had in a letter to the Finance Minister Pranab Mukherjee said, "The effort of (bringing PF withdrawals under Income Tax purview) shall adversely hit the salaried class as their social security shall be seriously hampered. This is just not acceptable."

Cautioning the government that implementing the proposal could create a "serious situation", the HMS appealed to the finance minister "not to open...a confrontational front".