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Benefit account system from DTC was unfortunate
August, 30th 2010

The new Direct Tax Code is now well on its way to becoming the law of the land. From April 1, 2011, many things will change, but compared to the original draft of the code, the changes are not nearly enough.

Now that the dust has settled and we know exactly what has made it into the final bill, its instructive to discuss the ideas that were dropped.

Of all the opportunities missed, the one thats the most unfortunate is the dropping of the proposed Retirement Benefit Account system.

Its interesting that of all the changes that have been made since the original August 2009 draft of the code, this was the only one that was universally recognised as desirable, and yet was dropped because it was said to be impractical.

As envisaged in the August 2009 draft, this would have been an account into which all retirement benefits would have been kept by individuals. The deposits could have come from VRS, gratuities and other post-retirement payouts. Within the account, these could have been kept in a savings instruments like the NPS and others which would be approved for the purpose.

As long as the money stayed in the account, it was not taxable. It could also have been moved around within the approved instruments without attracting tax. This account would have meant that not only would post-requirement payouts received at age 60 would not have been taxed at the time, but they could have been earning compounding returns for years or decades without being taxed. The extra returns could easily have compensated for the (deferred) taxation.

But that was not to be. The June 2010 revision of the DTC said that maintaining individual Retirement Benefits Account by permitted savings intermediaries on behalf of all employees would require a centralised, nation-wide authority to regulate and manage crores of retirement benefits accounts of employees and to deduct tax on withdrawal which entails creation of a separate institutional mechanism, complex logistics and substantial costs.

So this is not a flaw in the concept itself, but an implementation problem. Actually, the concept of an account like this should actually be extended in other ways, as in the US, the 401(k) account has been extended to the so-called Roth 401(k).

While the 401(k) is much like the retirement benefit account of the original DTC, the Roth 401(k) is a sort of a T-E-E account. In an account like this, if deposits are made with tax-paid funds and then held till retirement, then the theres no further taxation at any stage.

Such unified accounts would doubtless be beneficial in every way to the retiree as well as to the tax authorities. Even if they are too complex to implement now, that could change within a few years.

Theres no reason that such a system should now be forgotten till 2061, when (extrapolating from the track-record), the Direct Tax Code is due for the next overhaul. If the government thinks the UID feasible, then at some point in the next decade or so, a unified retirement account should be possible.

I mean how complex can it be? Its not as if its something truly difficult like, for example, organising an international sports event.

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