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Provident Fund Climbdown

Sentinel Digital DeskBy : Sentinel Digital Desk

  |  21 April 2016 12:00 AM GMT

For the second time in two months, the rendra Modi government has backtracked in seeking to change the way the Employee Provident Fund (EPF) works. The public relations mess on both occasions has reinforced the belief that this government is anti-labour, despite its protestations to the contrary. In February, Fince minister Arun Jaitley came out with a budget proposal that triggered a countrywide outcry among the salaried class. He announced that if an employee withdraws his EPF money, 60 percent of it will be taxed. Earlier, the EPF – a savings instrument of equal contributions from employer and employee – was completely tax-exempt and could be fully withdrawn 60 days after an employee’s exit from a firm. Having stirred a hornet’s nest, the government rolled back its decision within 24 hours by saying that it would tax only the interest earned on the fund. At that time, the Fince ministry had also laid down a new restriction – that the employee can withdraw only his contribution and the interest accrued on it on cessation of employment. To withdraw the employer’s contribution to the EPF, the employee would have to wait until he turned 58. This new rule effective from 1 April too has brought labour unions on to the warpath, as witnessed in Bengaluru on Tuesday when agitating garment workers blockaded roads, torched public vehicles and fought the police. The workers’ main grouse was – why should the government withhold their EPF money, their only hard-earned savings, until they turn 58 when it would be too late to become self-employed or start their own little business?

The garment sector is a microcosm of how some aspects of the new economy being set in place by the government – have begun to impact labour. It is the latest phase in a long battle of attrition between labour perennially on the backfoot and the government (earlier the UPA with its neo-liberal economics and now the NDA) turning towards private enterprise. The hire and fire rate is higher in the garment sector and workers between jobs have to use their EPF funds as a cushion. Mostly low paid, they have little or no other savings to tide over jobless periods; after they turn 50, their employment prospects are bleak. If their situation rings a bell, it is because in many other sectors, workers face the same predicament. In fact, the government acknowledged this reality somewhat when the Fince ministry in a clarification on PF rules in March, argued that it wanted to encourage more private sector employees ‘to go for pension security after retirement, instead of withdrawing their entire money from the PF account’. Implying that this was the ratiole behind the budget proposal to tax 60 percent EPF withdrawal, the Fince ministry had to climb down by pointing out that while 40 percent EPF would continue to be tax-exempt, the interest component of the remaining 60 percent too would not be taxed ‘if invested in an annuity plan’. This in effect meant that the government was asking workers to trust it to mage their savings better, so that they don’t go penniless after retirement. But it is precisely the trust factor that seems to be missing between the workers and the government perceived to be corporate-friendly.

Delhi chief minister Arvind Kejriwal has rubbed in this ‘trust deficit’ by tweeting: ‘I was an employee myself... Why should my hard-earned savings remain with the government?’ There are also suspicions that the government has been disapprovingly eyeing the advantageous interest rates the Employees’ Provident Fund Organisation (EPFO) offers to subscribers, as well as its EEE (exempt-exempt-exempt) status with contributions, accrued interest and withdrawals all tax-free. Labour unions believe the government is trying to bring EPF on par with the far less popular equity-linked tiol Pension Scheme (NPS). The NPS, in which all new government employees joining service after 2004 have to subscribe, has a lock-in period of 60 years and is taxable at maturity. Only 60 percent of the total NPS savings can be withdrawn tax-free, the remaining 40 percent is supposed to be put in an annuity. The question is going out loud and clear – in a country with no social security net for citizens, is it fair for the government to force workers into a pension scheme which taxes their savings? For over six decades, workers have been considering their EPF savings as absolutely their own money, and are not likely to change now by accepting taxes and restrictions. So the government has its task cut out – if it tries to restrict access to savings for the workers’ own good, it must first win their trust with a really good scheme. This has to be done by taking all stakeholders on board through consultations and communicating plans clearly. Else the government will have to keep backtracking and losing face.

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