EPF tax row and rollback: Why politics always trumps economics in India
NEW DELHI: A ranking of India’s finance ministers should put Yashwant Sinha right there on top. He cleaned up the excise structure — it used to be a royal mess — and controlled subsidies. He brought down real interest rates, freed up telecom, and tried to deregulate fuel prices.
He also earned the gratitude of business journalists by moving the time of the Budget speech from the Raj era hangover of 5 pm to 11 am. This meant that the Budget editions of newspapers could be brought out in time to reach readers outside the cities.
Yet, Sinha remains somewhat unsung. The reasons for that could be two. First, not many at the time understood the full impact of what he was doing. Secondly, he was forced to climb down on some of his bold measures, earning for himself the sobriquet of Rollback Sinha.
In those days, there was still no ironclad consensus on the desirability and benefits of economic reforms. Sinha’s party, the BJP, did not have a majority in the Lok Sabha. Yet, he persevered until being moved to the external affairs ministry in 2002.
Those who know Sinha personally may be able to tell us how much he envies Arun Jaitley, the current finance minister whose party enjoys a majority in the Lok Sabha, and has a strong leader in Prime Minister Narendra Modi. But maybe Sinha no longer envies Jaitley. For economics remains as vulnerable to politics as it did in his time. Why else would Jaitley be forced to withdraw the tax on employee provident fund (EPF)?
The EPF tax was a real piece of reform. It was a move to cajole Indians to understand and accept the principle of taxation. And it came alongside the rise in taxes for the super rich (those earning more than ` 1 crore a year) and those earning more than ` 10 lakh in dividends.
As Jaitley told the HT after presenting the budget, there is a limit to which an economy can afford exemptions. The government needs money. The rural sector is in distress. The pay commission’s award and one-rank-one-pension have to be implemented. The infrastructure has to be put back on track. At the same time, deficit targets have to be met lest the rabble rousers denounce India.
Not that the EPF tax alone could address all our woes. Only 7 million salary earners would have ended up paying it, leaving some 30 million untouched.
But it was based on a sound principle. Since the National Pension Scheme is taxable, though only partially, so should the EPF. And if the tax on EPF drove money into pension funds, so much better for long-term investments. In any case, EPF is money on which you do not pay tax on maturity and you can spend it on whatever you want. If you don’t want to pay the tax, invest it in annuity schemes.
Modi recently told a gathering of industrialists that subsidy rationalisation should be extended to those enjoyed by richer Indians — and which are typically, as with the EPF, not called “subsidies”.
Unfortunately, the FM faced a deluge of protests in the media and elsewhere against the EPF tax. Curiously, some said the EPF was a handy tool to marry off one’s daughter. But the daughters can be married off even after paying a bit of tax. The government also sent out feelers that it might tax only the interest portion of the EPF. Secondly, the challenge of marrying off one’s daughter can be handled better through social change. Why doesn’t anyone use EPF to marry off their son?
Junior finance minister Jayant Sinha says that as a people we have to decide what kind of a society we want. If we want the government to take care of roads, pollution, public transport, and other things, we have to be open to paying taxes.
More to the point, it would be interesting to ask Sinha what is going through the mind of his father, Yashwant Sinha.
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