For many small entities,
the Supreme Court (SC) order will have a crippling effect at a time when they
are already suffering the blow of demonetisation. The ruling may also trigger a
whole litigious environment not only on Provident Fund (PF), but also around
other labour legislation such as bonus, gratuity, pension, etc. This article
deals only with the limited issue of accounting and disclosure under Ind AS
arising from the SC ruling on PF. Entities are required to do their own legal
evaluation or seek legal advice and consider an appropriate course of action.
BACKGROUND
Under the PF Act, the PF
contributions are required to be calculated on the following:
- Cash value of any food
concession.
An allowance like city
compensatory allowance, which is paid to compensate/neutralise the cost of
living, will be in the nature of dearness allowance on which PF contributions
are to be paid u/s. 6 of the EPF Act.
The term ‘basic wages’ is
defined to mean all emoluments which are earned by an employee in accordance
with the terms of contract of employment and which are paid or payable in cash,
but does not include the following:
- Cash value of any food
concession;
- Dearness allowance, house
rent allowance, overtime allowance, bonus, commission or any other similar
allowance payable in respect of employment;
- Present made by the
employer.
Multiple appeals were
pending before the SC on the interpretation of definition of ‘basic wages’ and
whether or not various allowances are covered under its definition for
calculation of PF contributions. The Court pronounced its ruling on 28th
February, 2019 on whether various allowances such as conveyance allowance,
special allowance, education allowance, medical allowance, etc. paid by an
employer to its employees fall under the definition of ‘basic wages’ for
calculation of PF contributions. It ruled that allowances of the following
nature are excluded from ‘basic wages’ and are not subject to PF contributions:
- Allowances which are
variable in nature; or
- Allowances which are
linked to any incentive for production resulting in greater output by an
employee; or
- Allowances which are not
paid across the board to all employees in a particular category; or
- Allowances which are paid
especially to those who avail the opportunity, viz., extra work, additional
time, etc.
The SC placed reliance on
the following rulings:
- Bridge and Roof Co.
(India) Ltd. vs. Union of India – The crucial test for coverage of allowances
under the definition of ‘basic wages’ is one of universality. If an allowance
is paid universally in a particular category, then it must form part of ‘basic
wages’. It also held that the production bonus which is paid based on
individual performance does not constitute ‘basic wages’.
- Muir Mills Co. Ltd. vs.
Its Workmen – Any variable earning which may vary from individual to
individual according to their efficiency and diligence will be excluded from
the definition of ‘basic wages’.
- Manipal Academy of
Higher Education vs. PF Commissioner – A component which is universally,
necessarily and ordinarily paid to all across the board is included. The
question was whether the amount received on encashment of earned leave has to
be reckoned as ‘basic wages’. The Court answered the query in the negative and
held that ‘basic wages’ never intended to include the amount received for leave
encashment. It held that the test to be applied is one of universality. In the
case of encashment of leave, the option may be available to all the employees,
but some may avail of it and some may not. That does not satisfy the test of
universality.
- Kichha Sugar Company Limited through General Manager vs. Tarai
Chini Mill Majdoor Union, Uttarakhand – The dictionary meaning of ‘basic
wages’ is a rate of pay for a standard work period exclusive of such additional
payments as bonuses and overtime.
Employers paid various
allowances such as travel allowance, canteen allowance, special allowance,
management allowance, conveyance allowance, education allowance, medical
allowance, special holidays, night shift incentives and city compensatory
allowance to their employees. Most employers have not considered these cash
allowances as part of ‘basic wages’ for calculation of PF contributions.
Consequently, many employers will suffer huge financial and administrative
burden to comply with the SC order.
INTERIM ACCOUNTING GUIDANCE
ON PF MATTER
For the
year ended 31st March, 2019 in Ind AS financial statements (and
Indian GAAP), should a provision on the incremental PF contribution be made
prospectively or retrospectively?
The SC ruling has clarified
the term ‘basic wages’, but has created huge uncertainties around the following
issues:
- From which date will the
order apply?
- Whether HRA that is paid
across the board to all employees should be included or excluded from ‘basic
wages’?
- For past periods, whether
employer’s liability is restricted to its own contribution or will also include
the employees’ contribution, in accordance with the PF Act?
- A review petition has been
filed in the SC by Surya Roshni Ltd., raising several issues. What will
be the outcome of this petition?
- What is the impact of the
SC order on employees drawing ‘basic wages’ greater than Rs. 15,000?
- How will the order be
complied with for employers using contract labour?
A very vital aspect will
arise for the consideration of the employers and the PF authorities as to the
date from which the judgement should be made effective. It will all depend upon
the position to be taken by the PF authorities and the position taken by the
employers. The SC only interprets the law and does not amend the law. The
interpretation laid down by the Hon’ble SC to any particular statutory
provisions shall always apply from the date the provision was introduced in the
statute book, unless it is a case of prospective overruling, i.e., the Court,
while interpreting the law, declares it to be operative only prospectively so
as to avoid reopening a settled issue. In the instant case, there is nothing on
record to even remotely suggest that the order pronounced by the Hon’ble SC is
prospective in its operation.
The PF law does not lay down
any limitation period and/or look back period for determination of dues u/s. 7A
of the EPF & MP Act, 1952. This may cause grave and undue hardship to the
employee as well as the employer if the demands for the prior period without
imputing a reasonable time limitation is sought to be recovered from the
employer. Therefore, in the event any differential contribution is sought to be
recovered from employers by the PF authorities, the employers may press the
plea of undue hardship to salvage and/or limit their liability for the prior
period by referring to the decision of the Hon’ble SC rendered in the case of Shri
Mahila Griha Udyog Lijjat Papad vs. Union of India & Ors. reported in 2000.
Alternatively, it can also
be argued that the employers in any event cannot be saddled with the liability
to pay the employees’ contribution for the retrospective period given that the
employer has no right to deduct the same from the future wages payable to the
employees as held by the Hon’ble SC in the case of District Exhibitors
Association, Muzaffarnagar & Ors. vs. Union of India reported in AIR (1991)
SC. There is no settled jurisprudence on what would constitute a reasonable
period.
Given the uncertainty at
this juncture, it would be advisable for the employers to comply with the said
Judgement dated 28th February, 2019 prospectively, i.e., effectively
from 1st March, 2019 and thereafter, if any claims are made by the
PF authorities for the retrospective period, the same can be dealt with
appropriately having regard to the facts and circumstances of each case.
There is uncertainty on the
determination of the liability retrospectively, because theoretically there is
no limit on how much retrospective it can get, and can begin from the very
existence of the company or the beginning of the law. Additionally, the review
petition and the fact that the PF department will need to consider hardship
before finalising a circular to give effect to the SC order, is exacerbating
the uncertainty. Furthermore, companies are not required to retain accounts for
periods beyond certain years. In rare cases, when a liability cannot be
reliably estimated, Ind AS 37, paragraph 26 states as follows, “In the
extremely rare case, where no reliable estimate can be made, a liability exists
that cannot be recognised. That liability is disclosed as a contingent
liability.” This approach can be considered for the purposes of Ind AS (and
Indian GAAP) financial statements for the year ended 31st March,
2019.
It should also be noted
that there is little uncertainty that the order will at the least apply from 28th
February, 2019. Consequently, a provision for both employers’ and employees’
contribution for the month of March, 2019 along with likely interest should be
included in the provision. However, any provision for penalty at this stage may
be ignored. For the purposes of an accounting provision, HRA should be excluded
from ‘basic wages’ even if these are paid across the board to all employees,
because under the PF Act ‘basic wages’ excludes HRA. However, the SC order has
created uncertainty even on this issue and employers may take different
positions on this matter.
The above position will
remain dynamic and may change with further developments. The following note
should be included in the financial statements as a contingent liability:
“There are numerous
interpretative issues relating to the SC judgement on PF dated 28th
February, 2019. As a matter of caution, the company has made a provision on a
prospective basis from the date of the SC order. The company will update its
provision, on receiving further clarity on the subject.”
The above
note is a contingent liability and not a pending litigation. Therefore, this
matter should not be cross-referenced as a pending litigation in the main audit
report.
SHOULD
A PROVISION BE MADE FOR EMPLOYEES DRAWING SALARY ABOVE Rs. 15,000 PER MONTH,
SINCE PF DEDUCTION FOR THESE EMPLOYEES IS IN ANY CASE VOLUNTARY?
Domestic
workers with basic salary exceeding Rs. 15,000 per month may not get impacted
due to this ruling – where PF contributions are made by the employer on full
basic salary or on minimum Rs. 15,000 per month. Such domestic workers may be
covered under proviso to Para 26A of the PF Scheme. The SC has not dealt with
this aspect in its ruling. At the outset, it may be noted that the provisions
of the EPF Scheme do not, inter alia, apply to an employee whose pay
exceeds Rs. 15,000 per month. Such an employee is construed as an excluded
employee within the meaning of Para 2(f)(ii) of the EPF Scheme and an excluded
employee is not statutorily entitled to become a member of the statutory PF
under Para 26(1) of the EPF Scheme. Even if the membership of the PF is
extended to such an employee in terms of Para 26(6) of the EPF Scheme, the PF
contribution statutorily required to be made by the employer in respect of such
an employee is restricted to Rs. 15,000 per month in terms of the proviso to
Para 26-A(2) of the EPF Scheme.
Even otherwise, it is well
settled by the decision of the Hon’ble SC rendered in the case of Marathwada
Gramin Bank Karamchari Sanghatana & Ors. vs. Management of Marathwada
Gramin Bank & Ors. that the employer cannot be compelled to pay the
amount in excess of its statutory liability for all times to come just because
the employer from its own trust has started paying PF in excess of its
statutory liability for some time. Therefore, no obligation can be cast upon the
employer to remit PF contributions in excess of its statutory liability under
the EPF Scheme. Having said that, the service regulation and/or contract of
employment entered into by the employer with the employees should not be
inconsistent and/or should not provide otherwise.
Another view is that the
employees in the workman category may demand the PF contributions on the
increased basic wages. If the demand is not met, they can raise an industrial
dispute under the Industrial Disputes Act, 1947 for grant of such increase. In
the case of management staff, though they cannot take up the matter under the
Industrial Disputes Act, in law, they can enforce their right through a Civil
Court. Whether or not the bargaining staff or the management staff will demand
the enhanced basic wages is altogether a different matter, but in law they have
a right to raise a demand.
For the purposes of an
accounting provision, most employers will assess that Ind AS 37 does not
require a provision with respect to PF contributions for employees drawing
salary greater than Rs. 15,000 at this juncture, because the liability is
remote.
