EPFO seeks waiver on transaction tax

Matter to be put up at CBT meeting today

Finance Minister P Chidambaram's proposed transaction tax has run into unexpected resistance from within the government itself, with the Employees Provident Fund Organisation (EPFO), asking for an exemption from the levy.

The Organisation, which has a large exposure in the bonds market, has decided to put the matter up as an agenda item for the meeting of its Central Board of Trustees (CBT), scheduled for tomorrow.

In a note put up for the consideration of the CBT, the EPFO has asked for an exemption from the tax levied by Chidambaram in the Budget for 2004-05.

The EPFO has argued that "income of provident funds, pension funds and Employees Deposit Linked Insurance funds are exempt from Income Tax under Section 10 of the Income Tax Act, 1961".

It adds that based on this principle, the "CBT may consider a recommendation to the Government of India for exemption of all the funds constituted under the Employees Provident Fund and Miscellaneous Provisions Act, 1952, from the Securities Transaction Tax".

In 2003-04, along with the exempted Provident Fund Trusts, EPFO had purchased government securities aggregating over Rs 10,000 crore through stock exchanges. It has said that if similar purchases are made in this fiscal, the "Securities Transaction Tax will be payable at the rate of 0.15 per cent as envisaged in the aforesaid Budget proposals".

The EPFO invests its corpus of incremental deposits in both the Provident Fund as well as in the Pension Fund, largely in central and state government securities. As on March 31, 2004, the total corpus of the EPFO was Rs 1,28,036 crore.

EPFO uses the wholesale debt market platform of the National Stock Exchange and the Negotiated Dealing System (NDS) of the Reserve Bank of India (RBI) for purchasing government securities.

For direct purchases from the RBI, only the NDS platform is used. But for purchases from secondary markets, the services of brokers empanelled with the State Bank of India are taken.

EPFO however does not pay any brokerage for its deals of Rs 5,314.08 crore on the wholesale debt market platform of the National Stock Exchange.

With effect from last year, the country's largest provident fund has also decided to tap the retail debt market segment of the National Stock Exchange for small purchases, again without paying any brokerage.

While the tax would not amount to more than Rs 15 crore for purchase of securities of Rs 10,000 crore, the note says it is the principle that is at stake.