Don't count on exemptions
What if you are told that every penny you earn will be taxed - either now or later! You may argue that this statement is incorrect as recently you have invested Rs 1 lakh in Public Provident Fund and Life insurance policies, which not only give yo...
What if you are told that every penny you earn will be taxed — either now or later! You may argue that this statement is incorrect as recently you have invested Rs 1 lakh in Public Provident Fund and Life insurance policies, which not only give you a tax break under Section 80C, but even the interest/returns thereon and the withdrawals/maturity amounts are tax free.
While your statement is correct till the end of this financial year, you may have to eat your words after March 31, 2007, which may probably be the last day you are investing in some of these tax saving instruments on the understanding that the returns/maturity proceeds would also be tax free. The EET system may be introduced in Budget 2007.
What is EET?
EET stands for Exempt, Exempt and Taxed system. It is a system where your contributions to tax saving instruments will be deducted while computing your taxable income (E), the income or accumulations thereon will be exempt from tax (E), but the withdrawals of the contribution along with benefits in the form of interest, dividend, etc, will be subject to tax (T). This means that one has to rethink the way you invest in various tax savings instruments going forward, as the EET system is out to tax such savings.
Is EET a new concept?
The EET system is not completely new to India. Remember the National Savings Scheme (NSS)? Under the NSS scheme, the deposits that you made were allowed as a deduction and the interest thereon was not taxed every year. However, at the time of withdrawal, both the principal amount invested along with interest were taxed.
Even currently, the EET system of taxation is present in certain pension schemes (section 80CCC and 80CCD). India is not the only country, which may adopt this model. The EET system is presently followed in the US, the UK, Chile and Singapore. Almost two-thirds of the OECD countries follow the EET system with some variations for taxation of savings.
Migration to EET
Migration to the EET system would involve multiple substantive, as well as administrative issues. Some immediate concerns that come to mind are:
▪ How will it affect my existing tax saving investments? Will they also be brought under the EET system or will the system only apply to fresh investments made?
▪ What will happen to my existing life insurance policies where I will continue to pay premiums even after the EET system is in place? How will the old premiums paid be differentiated from the new?
▪ In case of my pure insurance policies (term plans), would amounts received on my death be taxed in the nominee’s hands?
▪
▪ How will my existing investments in PPF be differentiated from future investments?
▪ Would my payments towards housing loans and tuition fees continue to enjoy the benefit under the EET system ?
▪ Would gratuity payments and my employer’s contribution to superannuation funds be taxed under the EET system?
▪ Will investing in ELSS schemes of mutual funds be more beneficial?
▪ Will the amounts on withdrawals/ maturity be subject to TDS? If so, then do I need to file a return of income to claim the tax deducted?
Given the above, it could be difficult to accomplish complete migration to an EET system at one go for all savings instruments. The government will have to ensure that proper administrative procedures are in place before the EET system is rolled out. Taxpayers will hope that the government will only implement the EET system prospectively and will not touch past savings.
(The authors work with Ernst & Young)
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