The Government of India has recently made fundamental changes in the Employees Provident Fund Scheme, 1952 and the Employees Pension Scheme, 1995 (collectively referred to as Indian Provident Fund schemes) which will impact the expatriates and the employers with whom they work in India.
Background :
Before we discuss the details, it is important to understand the context in which these changes have been introduced. Indian employees are often deputed by their employers to different countries. These international assignments could be for a few months to a few years. The Indian assignees and their employers are generally required to contribute to the Social Security schemes of the host country. These contributions only add to the cost of the assignment without any corresponding benefit, as neither the employee nor the employer is generally able to withdraw the contributions on completion of assignment. Further, the employee is also generally not entitled to any benefits under the scheme on return to India due to the period for which contributions were made to the overseas schemes, not meeting the minimum required as per the social security law of the host country. Correspondingly, the expatriates working in India are generally not required to contribute to the Indian Employee Provident Fund and the Pension Scheme as their salaries exceed the threshold limit of INR 6,500 (USD 145) per month.
These changes impact employers who have expatriates working for them in India, except for expatriates from the countries with which India has signed a Social Security Agreement (‘SSA’) and hence, these changes are likely to put pressure on other countries to sign SSAs with India.
On the other hand, Indian companies and their employees working in countries with which SSAs have been signed are likely to benefit, as employees’ and employer’s contributions would be required to be made only under the Indian Provident Fund scheme and not under the host country schemes. This will reduce assignment cost for the Indian entities and enable them to be more cost effective in the competitive global environment.
Recent amendments in Indian Provident Fund Schemes :
International Workers (covers expatriates) :
A new concept of ‘International Workers’ (‘IWs’) has been introduced which includes expatriates (foreign citizens) working for an employer in India and Indian employees working overseas.
As per the Notification dated 1 October 2008 ‘International Worker’ means :
“(a) an Indian employee having worked or going to work in a foreign country with which India has entered into social security agreement and being eligible to avail benefits under a social security programme of that country, by virtue of the eligibility gained or going to gain, under the said agreement;
(b) an employee other than an Indian employee, holding other than an Indian passport, working for an establishment in India to which the Act applies;”
The IWs are required to join the scheme from 1st November 2008. Relief has been provided in case of an ‘Excluded Employee’ which primarily refers to an IW coming from a country with which India has entered into an SSA.
In this article, we have discussed the implications only with respect to the second category of IWs i.e. foreign nationals working in India.
As per the Notification dated 1st October 2008 ‘Excluded Employee’ means
“an International Worker, who is contributing to a social security programme of his/her country of origin, either as a citizen or resident, with whom India has entered into social security agreement on reciprocity basis and enjoying the status of detached worker for the period and terms, as specified in such an agreement.”
Amount of contribution :
The IWs (other than excluded employees) are required to contribute 12% of their salary to the Indian Provident Fund scheme. Further, the employers are also required to match an equal amount i.e. 12% of salary as their contribution to the scheme.
Compliance requirements :
Every employer is required to file a return in the specified form, giving details of the IWs including their nationality, basic wage, etc. within 15 days of the commencement of the scheme (i.e. 15th October 2008). The employers are also required to file a ‘NIL’ return in case they do not have any IW working with them.
Employers are also required to file monthly returns (within 15 days of the close of the month) in the specified forms furnishing necessary details.
Social Security Agreements :
India had earlier signed an SSA with Belgium and France and has recently signed Social Insurance Agreement with Germany. It is understood that India is in the process of signing SSAs with the US, Australia, Netherlands, Czech Republic, Spain, Portugal, Switzerland, Norway, Sweden and other countries.
Key features of the SSAs :
- Employees on an assignment upto specified periods (Belgium and France — 60 months; Germany — 48 months with an extension of 12 months) are exempt from making social security contributions in the host country provided they continue to make social security contributions in their home countries.
- Employees on assignment for more than the specified period and making social security contributions under the host country laws will be entitled to export the benefits under the SSA to the home country on completion of their assignment or on retirement. However this is not provided under the Social Insurance Agreement with Germany.
The Additional Central Provident Fund Commissioner (‘ACPFC’) has also issued certain clarifications with respect to these amendments and the Ministry of Labour has posted responses to Frequently Asked Questions (‘FAQs’) on their website clarifying the position relating to the IWs.
Key clarifications as per the ACPFC letter :
Payment of benefits: The payment of benefits in case of an IW holding other than an Indian passport and coming from a country with which India has signed an SSA, shall be as per the provisions of the SSA.
Contributions required to be made in India: All expatriates, except expatriates from Belgium (as the SSA with Belgium is effective from 1st September 2009) but including expatriates coming from France and Germany and holding foreign passports are required to contribute to the Indian Provident Fund schemes as the SSAs with these countries are not yet effective.
Withdrawal of Pension benefits under Employee Pension Scheme: For the IW (holding other than an Indian passport) coming from a country with which India has no SSA, the withdrawal of benefit under Employee Pension Scheme shall be based on the principle of reciprocity.
Other key clarifications as per the FAQ:
- An Indian employee shall be an employee, holding or entitled to hold an Indian passport and employed by a covered establishment.
- The Provident Fund rules will apply irrespective of whether the salary is paid in India or outside India.
- In case of a split payroll, the contribution is required to be made on the total salary earned by the employee.
- Even where an IW has multiple country responsibilities and spends some part of his time out-side India, his total salary will be considered for Provident Fund contribution.
- There is no minimum period of stay in India for triggering the Provident Fund compliances. Every eligible IW has to be enrolled from the first date of his employment in India.
- The purpose of the visit would determine the Provident Fund compliance requirements for an individual. The type of visa may help in determining the purpose of visit to India e.g. a foreign national coming to India on an employment visa would be considered as working in India.
- The cap on the salary for the purpose of Employee Pension Scheme and Employees Deposit Linked Insurance Scheme remains unchanged at Rs.6,500 as against no cap on salary for Provident Fund purposes.
Key issues:
Any change in legislation would generally lead to open issues which require further clarification. This notification leaves many questions in the minds of the employers and expatriates coming and working in India. Some of the issues which need to be addressed are:
Applicability to the establishment:
An issue that comes to mind is whether PF would be payable by a foreign employee of an employer, who is otherwise not liable to PF for any reason, e.g. if the number of employees are less than 20. In this regard, it is pertinent to note that applicability of the PF Act is qua the ‘establishment’, i.e. only if the establishment is covered under the scope, will the Act apply. Typically, factories and establishments employing 20 or more employees are covered (as per recent press reports, this threshold may be reduced to 10 employees to enhance the coverage of the PF Act). As such, PF would not be payable by a foreign employee of an employer, who is otherwise not liable to PF under the Act on account of any reason, e.g. if the number of employees is less than 20.
Employer-employee relationship:
In most cases, expatriates are seconded to the Indian entity while continuing as legal employees of the home country employer entity. For the PF Act to apply, an Employee of an Establishment should be deputed to work ‘in’ or ‘in connection with’ the work of such an Indian ‘Establishment’ to which the provisions of this Act applies. In such cases, it may need to be further examined whether an employer-employee relationship exists between the expatriate and the Indian establishment. There is no formula for determining the existence of a master-servant relationship and courts in India have laid down various tests such as accountability, right to recruit, right to decide leave, right to terminate, to ascertain whether an employer-employee relationship exists.
‘Salary’ to be considered:
Further, the quantum and manner of computing salary on which the contributions are to be based is also contentious. For example, in cross-border movement of employees, there could be different employment arrangements and services could be rendered in different jurisdictions, salary could be paid in different countries and also at times, by more than one employer. A question arises in all such arrangements on whether salary paid by the overseas entity would need to be taken into account for this purpose. If the IW is employed by the Indian establishment to which the PF Act applies and is rendering services in connection with the establishment in India, then a point that may need further examination is whether only the Indian salary which is covered by the Indian employment contract is to be considered. While, the FAQ has confirmed that total salary will have to be considered for PF, the legal position would need to be examined.
Contrary positions for income-tax purposes:
In certain cases, the Double Taxation Avoidance Agreements between countries provide exemptions to employees from double taxation of salary income in both countries, if the prescribed conditions are satisfied. Typically, these would be – duration of stay in India should be less than 183 days during the relevant period and the remuneration is paid by, or on behalf of, an employer who is not a resident of India i.e. implying that the overseas entity should be the employer.
Accordingly, in cases where the above-mentioned short-stay exemption is claimed, the overseas entity is considered as the employer for Income-tax purposes. As per the FAQ, PF would be payable by the Indian entity in its capacity of ’employer’ irrespective of the duration of stay in India. This would imply that the Indian entity is the employer for PF purposes. As a result, different positions would be adopted for the same individual under the Income-tax law and Provident Fund regulations and this may give rise to disputes and litigation.
Withdrawal of pension:
There are also issues around withdrawal of the balance at the end of the assignment. When an IW completes his assignment in India and leaves India to continue his employment abroad, he would be permitted to withdraw the accumulated PF balance.
However, the employer’s contribution to the Pension Scheme (i.e. 8.33 per cent of INR 6,500) can be withdrawn only subject to satisfying certain prescribed conditions such as:
- Eligible service of 10 years or more and retirement on attaining the age of 58 years;
- Early pension if rendered eligible service of 10 years or more and retirement or otherwise cessation of employment before attaining 58 years.
The withdrawal also depends on the principles of reciprocity with the home country of the IW where there is no SSA in place. Therefore, if the IW comes from the US, as an example, it would depend on whether the US would allow to freely repatriate such balance for Indians on completion of the assignments in the US.
Therefore practically, the withdrawal of the pension amount appears to be difficult.
Recovery by employer:
Another important point that arises is that, most expatriates are generally equalised on income tax and social security benefits, i.e. they would be guaranteed atleast the same net salary (after tax and social security deductions) while on assignment in India as they earned in their home country, prior to coming on assignment. On completion of the India assignment, the IW would receive the refund which consists of the employer and employee PF contributions and the interest thereon. As part of the equalization policy, the PF contributions may have been borne by the employer and hence, the expatriate may now be obligated to repay the employer this amount.
The PF Act protects the amount standing to the credit of any member in the Fund and states that this amount shall not be capable of being assigned or charged and shall not be liable to attachment under any decree or order of any Court for any debt or liability. Further, neither the official assignee appointed under the Presidency Towns Insolvency Act 1909 nor any receiver appointed under the Provincial Insolvency Act 1920 shall be entitled to or have any claim on any such amount even though the employer may have funded the employee’s PF contribution (in addition to the employer’s contributions). This poses problems of recoverability for the employer especially since the amount involved may .be significant considering it is nearly 24% of salary.
Tax impact:
As most assignments are typically for less than five years, the withdrawal of the PF amount before completion of the five years may give rise to additional income tax implications.
In conclusion:
The laws in this regard are still evolving and there are a lot of open questions which need to be answered. Realistically, the SSAs may take a long time before they are effective and until then the cost of the assignment of the expatriates in India, along with the compliance requirements is likely to increase.
