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3 March 2016 Editorial


3 MARCH 2016 

Provident fund reform needs more clarity


The Central government finds itself in the thick of a controversy over the Budget proposal to tax a part of the accumulated corpus in the Employees’ Provident Fund (EPF) upon withdrawal. Gauging the popular mood, the Opposition is seeking to corner the government on this issue. The proposal is seen to hurt particularly the salaried middle class, considered a core constituency of the BJP. “Pension schemes offer financial protection to senior citizens,” Finance Minister Arun Jaitley said in the Budget speech. “I believe that the tax treatment should be uniform for defined benefit and defined contribution pension plans.’’ He proposed tax exemption for withdrawal of up to 40 per cent of the corpus at the time of retirement in the case of the National Pension Scheme (NPS). In the case of superannuation funds and recognised provident funds, including the EPF, the same norm of 40 per cent of the corpus being tax-free would apply to contributions made after April 1, 2016. From a larger social security perspective, Mr. Jaitley’s intention to lay the groundwork for a “pensionised society” is laudable. In an ideal environment, there is a justifiable case for prescribing a level-tax treatment for similarly positioned pension plans. However, in the pursuit of a principled taxation policy, the government should have imposed a similar provision for its own employees’ retirement savings in the General Provident Fund. But as things stand, they will continue to get a tax-free lump sum for their sunset years from the GPF apart from a pension, albeit on a defined contribution basis through the NPS for those who joined service after 2004.

The government should have also tried to distinguish between a regular pension scheme and a provident fund (that also provides a pension). Why should it force EPF subscribers to get two pension cheques, which once credited to their account would form part of their taxable income? The point is, the reform needs to be carefully calibrated. Besides the tax benefits it fetches, EPF is often seen as a reliable tool to force-save for the future. It has been, in a way, playing a critical role in inculcating the habit of saving in a country with a very limited social security net. In a sense, individual contributions to EPF could also be construed as a way of enabling a corpus to meet critical lifetime event expenditures. In any case, the contribution of employees to the provident fund is not tax exempt beyond the annual ceiling of Rs.1.5 lakh. Therefore, the tax on withdrawal will be tantamount to double taxation. For, one would have paid tax at the time of contribution as well. If the intention is to prod people to plan for pension, the government would do well to invigorate the Employee Pension Scheme, which exists today as a component of the EPF. The limited annuity product option also does not help the cause of force-driving people into a pension system. The government appears to have put the cart before the horse in this instance.

Blow for reformists in Iran 

Final results from Iran’s February 26 elections to Parliament and the clerical body, the Assembly of Experts, show that the moderates have clinched a resounding political victory. In the 290-seat Parliament, the reformist allies of President Hassan Rouhani won at least 85 seats, while the moderate conservatives secured 73 seats. Together they will control the House. The hardliners, who were steadfastly opposed to Mr. Rouhani’s reform agenda, won only 68 seats. In the 88-member Assembly of Experts, the clerics backed by reformists and centrists claimed 52 seats. This is not the first time Iranian voters have spoken their mind against the hardliners. For the last many years they have consistently pushed reformist or less conservative candidates through Iran’s rigid electoral process. Still, last week’s twin elections were highly significant for Iran’s polity in general and Mr. Rouhani in particular for a number of reasons. This was the first election after Mr. Rouhani secured the historic nuclear deal with world powers last year, ending the country’s isolation in return for giving up its nuclear programme. The hardliners were opposed to the nuclear deal. Even the Supreme Leader, Ayatollah Ali Khamenei, had warned the political leadership several times against any rapprochement with the West. The hardliners had also opposed Mr. Rouhani’s plans to open up the country’s economy and reach business deals with overseas companies, including those from the West. 

Had the moderates suffered an electoral setback, it would have been a major blow to Mr. Rouhani’s reform agenda. It would also have cast a shadow on his re-election prospects next year. Now it is evident where the popular support lies. And with his allies controlling Parliament, the President could push his legislative and economic agenda at ease. Second, the election of more moderate candidates into the Assembly of Experts than hardliners is a significant achievement for the reformist movement. The Assembly is an important clerical body in Iran’s Islamist establishment which can, technically, choose the next Supreme Leader. If the clerics elected to the body work in coordination with the moderate politicians, that could change the balance of power in Iran’s complex polity. However, to anticipate any dramatic change in the system would be overriding the mandate. Those who call for rapid improvement in the human rights situation in Iran and for the weakening of the role of the clergy in politics will continue to be disappointed. The system is too complicated, with direct checks on the powers of everyone but the Supreme Leader. As long as the Supreme Leader backs the hardliners, Mr. Rouhani is unlikely to take any radical initiatives. Nevertheless, the election results represent a clear step forward in Iran’s gradualist transformation from a rigid Islamist theocracy into a broader religious democracy. Mr. Rouhani’s challenge is to build on the electoral momentum and strengthen the moderate currents in Iran’s politics and society, and thereby expedite the pace of transformation.

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