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Saturday, Mar 12, 2005

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A cruel change in the name of `global practice'

P. Devarajan

Mr Chidambaram is probably unaware that provident fund is the lone corpus on which retired old men and women live and if that gets pruned they will find living tortuous.

INTEREST income on deposits under NRE accounts will be forever exempt from income tax.

At one point, the Government had decided to scrap the incentive after March 31, 2005. The Memorandum explaining the provisions in the Finance Bill, 2005 says income tax exemption will continue after April 1, 2005 and "will apply in relation to the assessment year 2006-07 and subsequent years."

An RBI Internal Working group on External Liabilities of Scheduled Commercial Banks last year had argued for knocking away the favoured treatment to NRI deposits. The Report says: "The Group deliberated at length on the existing tax regime governing NRI deposits including the appropriateness of the existing tax incentives. The Group feels that tax concessions on NRI deposits were given in the period of difficult balance of payments conditions and low forex reserves to attract such deposits. Over the years, forex reserves situation has improved. The quantum of NRI deposits has increased substantially and their share in the country's external debt is continuously increasing. The interest income on resident deposits as also on external commercial borrowings is taxable. Keeping these factors in view as also the need for maintaining uniformity of treatment, the Group recommends that interest income on non-resident deposits may be made taxable on a par with domestic deposits and external commercial borrowings (ECBs) consistent with the current account convertibility."

That has not happened and it could be that the Government wants reserves to grow. Or it just could be that an Indian is cursed to be treated as a zero class citizen in his own country. Just think of it. An individual working in a factory or anywhere else is not double taxed but triple taxed (for the Finance Ministry he may be triple blessed).

Before his salary is credited into his bank account tax is cut at source. Second, he is liable to pay tax on interest income beyond a limit.

Third, he will be taxed for withdrawing his own salary on which tax has been paid (Does this apply to NRIs?).

For the Finance Minister, Mr P. Chidambaram and RBI it may be just "international practice". Yet, another cruel change in the name of "international practice" is the proposed shift from EEE to EET for mandatory savings plans and insurance products.

The Government would like to get out of EEE where contribution to specified savings (E), the accumulation (E) and the withdrawals/benefits from the savings (E) are all exempt from tax.

Under the EET, any withdrawals or benefits will be taxed (T) because it is "highly distortionary resulting in economic inefficiency and inequity." Is it so? When there is no social insurance scheme, is it not indecently inhuman to tax withdrawals under Provident Fund when an individual retires at the age of 60?

Mr Chidambaram is probably unaware that provident fund is the lone corpus on which retired old men and women live and if that gets pruned they will find living tortuous.

The Explanatory memorandum says: "With a view to removing such distortionary effects, it is proposed to adopt the EET method as the most preferred option. However, the shift from the existing EEE method to EET method is likely to impose transitional administrative problems though not insurmountable. The design of some existing saving schemes in operation, particularly mandatory plans and insurance products, may not allow for sufficient flexibility in the short run to switch to an EET method of taxation. Therefore, it is proposed to set up a committee of experts to work out the roadmap for moving towards an EET system. The committee will also examine the mix of savings instruments that would qualify under the EET system."

The Finance Minister should not be allowed to get away with EET on Provident Fund.

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