Economic Highlights

New Delhi, 28 August 2009

New Tax Or Extortion?

LEAVE RETIREMENT BENEFITS ALONE

By Shivaji Sarkar

Notwithstanding the suffering, the recent meltdown is a great learning opportunity. At least it is should be so for those who drafted the new tax code. In the US, the worst losers have been the millions of retired people, who had invested in pension funds. Despite the best of regulations these funds were mismanaged by the operators and robbed the pensioners not only of their pension income but their lifetime savings. Ironically, the new code tries to force the superannuated to invest in such schemes.

Importantly, a tax code should have basic neutrality. It should not try to rob the citizens to help a particular industry or section prosper. However, this is precisely what it tries to do. This apart, the code also proposes to tax retirement benefits, which are not taxed as per the IT Act 1961. There is a reason. Such benefits are not doles. An employee is given the benefits on the basis of his contribution to an organisation. It is considered deferred wages – the unpaid wages that remain with the employer and are paid on superannuation. Neither the employer nor the Government has a right on this income. It belongs only to the employee.

Since the employee has already paid the requisite tax on his income all thorough his working career, the benefits accruing through all these years and paid at the end of his service cannot and should not be taxed again. If these are it would amount to doubly taxing the same income. Thus, it was left untaxed because, an employee is given this delayed payment of his wages so that he could fulfill many of his unaccomplished family obligations such as children’s education or marriage or other ways he wants to invest to start a career for them or himself. In addition, he would also have to pay a higher medical bill, which on retirement would not be reimbursed. This accumulation takes care of such eventualities and liabilities as well.

The aim of the new code should be to allow retired people to live in peace. They have contributed to the society and now it is time for the society to pay them back. Taxation is a payment to the State for ensuring certain safety and security. The premise of the tax code that “taxes are payments without a direct quid pro quo” is absolutely incorrect. Taxes are paid so that the State takes care of the well-being and welfare of its people. It does not have the right to deprive them of what they ought to have or impose an oppressive regime.

Therefore, doing away with “EEE” (exempt, exempt, exempt) category for Provident Fund and similar other investment is also against that very concept. The State does not and has not taxed these amounts so that the employee is left with enough money to take care of his own welfare. If taxed then the State would also have to make provisions on its own to fill the void it intends to create. But it avoids doing so, because it finds such measures would be expensive. So why to burden the employee? Removing exemptions would only prove costly for the State, so let these continue.

In fact, when it was suggested that most exemptions should be done away with, it was on the premise that the Government would be bringing in a very low tax regime. Sadly, the new tax code does not ensure that. Taxes remain high with the horrible aim of earning more revenue by robbing the taxpayer. The code has not tried to lower the burden and broaden the base. It must do that and leave the retired people alone. They cannot and should not be left at the mercy of sharks, which run pension funds.

Besides, it is unethical to force a retired person to invest in equity-linked products to qualify for tax exemption. It should naturally and automatically come to him. Moreover, it is difficult to comprehend why the Government should be a promoter for an unethical equity market and throw the poor retired folks as fodder for them. No Government instrument should try to promote a known risky proposition.

The code has shown a tremendous maturity in disallowing exemptions on mutual funds and other equity-linked schemes. Regrettably, the pension funds have not been included in that list. These have been charging exorbitantly and are also investing in equities. If the Government is keen on promoting these funds, it must charge an administration fee of not more than one per cent against the 40 per cent as is being done now. It should also function transparently. Presently too many jargons are being used to confuse the consumers. The nature of product is never clear. Unless and until the Government is able to streamline and have a transparent structure, such funds should not be promoted.

Another aspect that needs review is the level of limitations on exemptions being proposed on health insurance, medical treatment for disabled dependent and treatment for selected diseases of self or spouse. It is being maintained at an existing level of Rs 30,000, Rs 50,000 and Rs 40,000 respectively. The amount proposed for health insurance may not be raised but the exemption limit for medical treatment should be at the actual expenditure level. The Government health sector does not provide any relief. The charge for a visit to a general physician itself is a matter of great concern. A practicable solution could be to allow all medical treatment expense, even outpatient, as a tax relief and a retired person should be allowed 100 per cent exemption.

The code has also proposed to tax withdrawals from provident or annuity funds. This is regressive. One withdraws for either investing or purchasing. Either way, it boosts the industry. Besides, nobody withdraws unless he has a pressing need. The Government cannot punish such people. Unmistakably, the tax mode, not merely the code, needs to be simplified. If it wants to do away with all exemptions, it would have to bring down the basic tax rates to a minimum. It hasn’t done so. It must or else it will become an instrument of extortion as it proposes to be in many ways. ---INFA

(Copyright, India News and Feature Alliance)