EPFO faces Rs 7,000 cr tax demand on premature withdrawals

The Income-Tax Department has slapped the Employees' Provident Fund Organisation (EPFO) with an unprecedented tax demand for failing to tax premature withdrawals by account holders, a move that could saddle the organisation with liabilities of more than Rs 7,000 crore.

The Central Provident Fund Commissioner, Samirendra Chatterjee, who oversees the EPFO, said the I-T department's decision to slap these tax notices on two PF offices in Delhi was "untenable", and his organisation would move the Delhi High Court to quash the tax demand. The dispute raises the possibility of yet another open war between two government arms under two ministries.

The EPFO comes under the labour ministry while the I-T Department is under the Ministry of Finance . The two have recently been at loggerheads over a 9.5% EPF rate for 2010-11, and over the EPFO's refusal to invest in equities, which the finance ministry has been insisting on since 2005.

The tax officials, while imposing this liability, have justified their action by citing a rule in the 1961 Income Tax Act that stipulates withdrawals of provident fund money by individuals who have not completed five years of contributions to the EPF should be subject to income tax. So far, this tax demand has been raised on only two PF offices and for a two-year period between 2007 and 2009, but the EPFO is apprehensive the same demand can be slapped on all its 120 or so offices that by and large follow the same policies and procedures.

The EPFO is the custodian of retirement savings of some 5.87 crore private and public sector employees in the country. C h at t e r j e e suggested the IT Department's move was impractical and at odds with the government's income-tax exemption ceilings . "Our mandatory salary ceiling for PF coverage is Rs 6,500 per month. How can we tax a worker who doesn't even fall under the taxable annual income bracket of Rs 1.8 lakh?" he asked. Chatterjee said EPF savings were not taxable under the EPF Act of 1952.

"And if at all tax has to be levied, it has to be the employers' responsibility as they are aware of workers' total incomes while we may not know even if they are paid more than Rs 6,500 per month." The I-T department's move has also drawn sharp reactions from trade union officials. "It is ironic that the government keeps dithering over bringing back black money from tax havens, but doesn't think twice about taxing the middle class' retirement savings," said AD Nagpal of the Hind Mazdoor Sabha and its representative on the EPFO's central board of trustees.

The I-T Department's demand effectively means all future withdrawals from provident fund accounts by individuals who have made PF contributions for less than five years would henceforth have to be taxed at source by the EPFO. The department argues only longterm contributions to the provident fund should be tax-free to ensure parity with other long-term tax savings instruments such as National Savings Certificates and Public Provident Fund deposits, which have five-year lock-ins. The tax department has been seeking to enforce the 50-year-old rule for the past two years.

In February 2009, it began asking the PF departments for details of all workers' claims settled before five years. Last December, the Central Board of Direct Taxes even issued a circular to reiterate the law. Last week, top EPFO officials, responding to summons from the I-T Department, shared information on the total money credited into workers' accounts in 2007-08 and 2008-09 from the two PF offices in Delhi. The department followed this up with its assessment order.

According to the order, a copy of which is in ET's possession, the department has assumed half the total EPFO payouts to individuals falls in the premature withdrawal category "in the absence of specific in-formation and considering the churning of corporate employees and the economic scenario of frequent job changes". Consequently, a tax demand of more than Rs 285 crore was levied on the two PF offices. The figure assumes a top tax rate of 33.66% and penal interest at 18%.

Calculations by ET, assuming a similar formula for all the 120-odd PF offices in the country that together pay out settlement claims worth Rs 11,000 crore annually, show the EPFO could be saddled with a tax liability of around Rs 7,000 crore for three financial years ending in March 2010.

Incidentally, a recent EPFO study concluded more than 70% of all withdrawals were made within three years of service and nearly 90% were made before five years. This would make the I-T department's assumption of 50% withdrawals being premature a conservative estimate. But for the EPFO, having to pay tax on behalf of account holders who have withdrawn their savings is a serious problem. It has no system in place to track such people and neither can it pay the tax liability from its own funds.

Experts say the EPF law is subordinate to tax laws and the PF authorities could have a tough battle on their hands. They say Section 9 of the EPF Act deems the fund as a recognised PF trust under the Income Tax Act of 1922, which establishes the primacy of I-T laws over the EPF Act.

Source : http://economictimes.indiatimes.com/personal-finance/savings-centre/savings-news/epfo-faces-rs-7000-cr-tax-demand-on-premature-withdrawals/articleshow/7894047.cms


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