EPFO served 1,000 crore service tax notice

NEW DELHI: The service tax wing of the finance ministry has slapped a Rs 1,000-crore notice on Employees Provident Fund Organization ( EPFO ) on the grounds that the entity that manages PF and pension for 4.7 crore employees had hired the services of fund managers and is liable to pay tax.

The move comes within weeks of the income tax department demanding Rs 7,000 crore for earnings from accrued interests.

The two notices are being seen as retaliatory action from the finance ministry after an exchange of letters took place between labour secretary P C Chaturvedi and R Gopalan, who is now the economic affairs secretary. Gopalan , who was financial services secretary till the end of January, had questioned EPFO’s assumptions on paying 9.5% interest during 2010-11 as also the decision to stay away from equity markets.

Chaturvedi had retorted with an equally strong letter and the labour ministry had prevailed upon the finance ministry in the war over rates. EPFO has already moved the appellate authority, arguing that it is not a financial institution but an entity that provides social security net. Besides, it has argued that despite using the services of fund managers, its corpus hardly generated any profit.

“The transactions undertaken by EPFO are not commercial in nature. All the effort and expenditure that they incur in managing the funds are paid in the form of interest to subscribers ,” a labour ministry official said. It has taken a similar stand in its plea to the income tax appellate authority.

EPFO’s argument: whatever its earnings are from the interests in invested funds are distributed to its subscribers at the end of the year. “PF earnings are interestfree . How can we be expected to pay income tax?” an official asked. Both matters are pending in appellate tribunals . However, if the notices are a oblique pointer to a labour and finance ministries’ face-off , with an element of “settling score” thrown in for a good measure, it could linger for long. The EPFO may even have to move court.

The finance ministry took a long time to give its nod for the 9.5% interest rate. It had cited the Comptroller and Auditor General’s objection about provident accounts not being up to date, and hence argued that EPFO’s calculations were faulty. Members of EPFO’s central board of trustees (CBT) had reacted sharply to the objection.

They had argued that the finance ministry had no right to quibble over interest rates since it didn’t pick up the tab. CBT didn’t invest in the capital market since there was no commitment to a guaranteed minimum rate of return.