Among the key proposals of the new Direct Tax Code, now open for public debate, the one to replace the EEE (Exempt-Exempt-Exempt) method of taxing certain long-term savings, especially the employees provident fund (EPF) and the public provident fund (PPF), with the EET (Exempt- Exempt-Tax) method has invited a great deal of comment. The EET differs fundamentally from the EEE in that the proceeds on withdrawal — usually, but not always, at the time of superannuation of the taxpayer — are taxed. Under the EEE method, the initial investment, the interest earned, and the maturity amount are free from tax liability. Considered in isolation, there is no doubt that many categories of investors, including salaried employees, will be hurt badly in financial terms by the switchover to the EET regime. The EPF and the PPF have been considered better than other forms of long-term savings also because they assure a steady rate of return and are not subject to court attachments. Without the tax exemption on withdrawal, these schemes might lose much of their appeal particularly to the salaried classes,for whom they have practically been the only form of savings.
The case for the EET rests on the guiding principles of the Code which seek to do away with most of the exemptions while substantially lowering the tax rates. The EET regime will provide for uniformity in the tax treatment of various savings instruments.The Code has proposed a substantial increase in tax slabs and a significantly higher Rs.3 lakh deduction for investments. The substantially higher portion of incomes that will be left in the taxpayers’ hands initially, coupled with the higher limit for investments that would remain tax exempt, should, it is hoped, compensate for the outgo on account of tax on savings after maturity. Investors are unlikely to be guided by tax treatment alone; they would be able to appraise the risks and rewards in any savings scheme more objectively. It should be a matter of considerable relief for the existing investors that only contributions to the provident funds and the PPF made on or after the commencement of the Code will be taxed. However, this is an aspect that needs to be debated, and the overall balance of advantage or loss made clear to the taxpayers.