Let us worry about provident fund taxation after the parliament passes the bill. Let us look at some of the logic..and before that at the history.
Sometime in the 1990s the Government of India woke up to one ponzi scheme called the US 64. Nobody knew what the NAV was. You invested in April, and you sold in March. Thus you made short term capital loss, and set if off against other income. In the meanwhile you got the dividend which was tax free to the extent of 60% (remember 80M?). This had to stop, and it did stop. Yes many people cried fraud, etc. but largely it was pulled off.
MMS woke up to another ponzi scheme called the ‘Defined Benefit scheme’. Here the government said we will not pay ‘defined benefit’ but you will have to create your own corpus and create a pension. NPS was born.
IN 2016 Arun Jaitely (or perhaps J Sinha) woke up to another ponzi called the ‘provident fund’. Imagine you are earning a salary of Rs. 50,00,000 and you are allowed to contribute Rs. 600,000 to your provident fund. Great. You then make a Rs. 400,000 voluntary contribution. All this goes to the government pension scheme and you get 8.4% p.a. TAX FREE. This is awesome is it not? and you get it year on year for the next ‘n’ number of years till you withdraw the money. There is NO reason at all for the government of India to be borrowing at such a high rate and that too tax free. The government can today easily get money at say 7% tax free – see Hudco bonds which are being sold today in the market at 7.5% for 15 years.
Maybe it was the government’s way of reducing the interest rate by taxing the interest. They have made a mess. I will wait for the parliament to pass the bill before I comment more on that. The Government needs to cap the Provident fund contribution to Rs. 150,000 for a person like the public provident fund has been capped. Even better, the government should reduce interest rates on all the government saving schemes, and bank deposits. The government could make bank interest tax free for senior citizens and reduce the interest rates to say 7% p.a. AND PEOPLE WILL HAPPILY TAKE IT. Taxing provident fund withdrawal is painful. The problems obviously got worsened in recent times when salaries have gone into crores. So for a person who is contributing a big amount of provident fund the government is subsidizing the provident fund. Best would have been forcing more big corporates to move to the NPS or to their own scheme. Here the government need not give any subsidy.
The government could have got more money by raising the ceiling amount in PPF to say Rs. 10,00,000 and keeping the interest rate at 7% p.a. tax free. Or link it to the 10 year Gsec and make it 1.5% lower than Gsec with an annual re-set. Easier steps than taxing the interest.
In case of companies who manage their own Provident fund contributions too they had to match the government’s ponzi scheme and this was almost impossible. Then there would be employees who would leave their job but not claim their provident fund (advisers told them to leave it to earn 8% pa tax free). This had to stop.
The government was paying (is paying) a much higher rate of interest because there is no good secondary market in the retail debt segment. Now they are saying that they want to develop a secondary market (believe me RBI never wanted this according to many bankers). Let us see if RR makes a difference to this approach. They could start by making all the post office schemes available online. Yes it could take 10 years to make it compulsory to go online…but at least the offer should be made for people to get it online. I am convinced that there are more fake national savings certificates in circulation than what we are willing to accept. That will stop.
The government should force all companies with more than Rs. 10,000 crores of public money – equity, debt, bank loans – should be forced to meet their financial requirements by issuing bonds to the public. So say a big company like LnT or even a smaller company like Indigo which have a lot of requirement for funds will all raise bonds. Once corporate India does that they SHOULD force banks, municipalities, and state governments to raise money from the public…
Ha! if wishes were horses..
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