EPF dilemmas

Reform a casualty amid much confusion

One of the reformist thrusts of the central government in the recent past seems to be becoming a casualty of rollback and confusion. The government had announced, in the last Union Budget, its intention to address the subsidies and tax exemptions carved out for the Employee Provident Fund, or EPF. It announced that, for money invested after April 1 this year, a part of the withdrawals from this savings instrument would become taxable. Other changes were also carried out or announced at around that time - such as the raising of the age of retirement, in an early-February notification, for the purposes of the provident fund from 55 to 58 years. It also tightened the rules governing withdrawals, stipulating that they would not be permissible before a member turned 58. The government also agreed to put interest into inoperative accounts - to which no contributions have been made in 36 months - which would have been a major plus. And finally, as part of its attempt to bring down small savings rates across the board, the finance ministry appeared to have marginally reduced the interest rate on EPF deposits from 8.8 per cent to 8.7 per cent.

However, its messaging about these changes was abysmal and it seemed that within the government there was lack of unanimity of views on the proposed changes. Also, the government found itself at the receiving end of considerable middle-class anger. Even so, it should have been able to ride out the storm. But that is not what happened as the government rolled back many of these reforms. First, barely more than a week after it was announced, Finance Minister Arun Jaitley set aside the Union Budget's proposal to tax a part of the withdrawals of EPF deposits, made with effect from the start of the current financial year. In the process, the original idea of bringing EPF on a par with the National Pension System in terms of its tax status was also abandoned. Protests continued about certain other provisions that among other things barred withdrawal of deposits before a member completed 58 years. Such protests were led especially by trade unions in the organised sector. Then, last fortnight, amid considerable confusion, the labour ministry rolled back the early-February notification that had made various changes to the withdrawal norms.

Read more from our special coverage on "EPF"

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• All you need to know about the Employee Provident Fund
• Govt buries EPF tax after massive protest from salaried middle-class
• FinMin officials under fire for EPF tax row
• Peoples concerns on EPF tax proposal legitimate: Sinha

Now comes news that the finance ministry appears to be retreating from even its marginal decrease in the EPF's interest rate. Reportedly, it has said that its lowering of the rate to 8.7 per cent from 8.8 per cent was only "advisory" in nature. The labour ministry, meanwhile, has said that the lowering of rates was a "directive". The central board of trustees of the EPFO, the finance ministry, and the labour ministry all seem engaged in passing the buck. In the process, the last remaining portion of the attempt to rationalise the EPF system looks likely to be jettisoned. This does not bode well for the future of this - or indeed, of any - politically sensitive reform. The finance ministry should have been clearer about its intentions at the start, taken the unions and its own government into confidence, and gone ahead with the reform.