EET's not easy

A committee set up by the finance ministry has recommended ways to ensure that tax-savings instruments get taxed at some point in their life-cycle""that is, they move to an exempt-exempt-tax (EET) cycle, as opposed to the current exempt-exempt-exempt (EEE). So it is reasonable to expect some mention in the Budget speech in February of the time frame over which EET will be introduced. To tax tax-exempted savings at the point of their being encashed (dis-saved) is logically sound, the argument being that you get the tax break if you put money into the system, but tax has to be paid if you take that money out to spend. To the extent that spendthrifts with extra cash will be required to pay more tax under the new scheme, the Left parties should find it possible to support the measure since it brings more equity into the tax system. It also brings in equity between different types of investments since the returns on some will no longer be propped up by tax benefits""bank deposits, for instance, suffer versus post-office deposits and also in comparison with mutual funds, and this is one reason why banks are not able to mobilise deposits at the pace that they would like.

That is not to argue that introducing an EET system will be easy. The prime difficulty arises with separating the past (when savings decisions would have been taken under one set of assumptions) from a future in which EET rules will apply. But even after this point is conceded, there is the issue of long-term savings instruments (like life insurance policies) for which future payment instalments have already been committed and from which no early exit is possible. It would seem therefore that the EET scheme may have to leave out all existing savings instruments for their full tenure. Otherwise, the scheme could be subject to legal challenge since the basis of a savings plan cannot be changed mid-way. More than the legal issue, however, would be the unpopularity of the measure, and the mayhem it could cause if there is a run on provident fund balances as people try to beat the deadline for the introduction of an EET regime. That could end up killing the whole scheme. Hence an EET regime would have to be purely prospective in its application, and there will therefore be no short-term pay-off.

The other challenge is in setting up the required financial and accounting systems. There have to be multi-year tracking systems, to verify claims across years. An individual who gets a 10 per cent tax break at the lowest slab, when s/he buys a savings instrument, will certainly feel cheated if s/he has to pay 30 per cent tax on dis-savings five or 10 years later, merely because that has become the applicable tax slab at that point. In order not to complicate the lives of investors/subscribers, organisations such as the Employees Provident Fund Organisation (EPFO) and all the banks/mutual funds/insurance firms will have to ensure the number of IDs for each client does not multiply. None of this is either impossible or very costly, but it requires detailed application. And that is where the challenge lies. Just introducing double-entry book-keeping in the EPFO to replace the current single-entry system, and bringing in a system where subscribers can log in and check the status of their accounts, has been an uphill task; even now, the system has not been introduced in several cities because of resistance from EPFO unions.