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The circular dated November 30, 2012, was issued after internal review meetings held in late November and has been forwarded to Employee Provident Fund offices across India.
Historically, most companies have been computing provident fund (PF) contributions (at 12% each by the employer and employee) against basic salary and dearness allowance only. However, the definition of basic wages has been a contentious issue, with PF authorities claiming that companies split the basic wages into various allowances to reduce the quantum of PF contributions.
Last year, the Madras high court and the Madhya Pradesh high court in two separate cases had held that various allowances paid by the employer to its employees under different heads such as conveyance, education, food concession, medical, special holidays, night shift incentives, city compensatory allowance, etc., qualified as basic wages under section 2(b) of the PF Act and needed to be included while computing the PF contribution.
Based on these judgements, PF officials carried out audits on India Inc and raised demands to recover the differential PF contributions. Later, pending dismissal of the writ petitions filed by these companies, the audits were held in abeyance.
“Following this circular, the PF officials may once again, commence audits of Indian companies to ascertain whether the PF contribution has been rightly computed and deposited,” says Yatin Pathak, chartered accountant.
Sonu Iyer, partner, Ernst and Young, points out a possible shelter that could be available in respect of employees in India. Proviso to paragraph 26A of the PF Scheme allows PF contributions by the employee as well as the employees on a maximum notional level of Rs 6,500 per month, instead of the entire salary (including various allowances). The rate remains the same at 12% each for the employer and employee contributions respectively.
“Not many employers have opted for this route, as PF is part of the employees cost to company and it also gives a tax shield to the employees. Now, if the employer organisation suddenly wishes to exercise this option and compute PF contributions only against Rs 6, 500 per month, it is not clear whether the PF authorities will oblige,” Iyer explains.
Expatriate workers from India also have to contribute to PF, even if their salary is paid outside India (unless they have exemption owing to a social security arrangement with the country to which they have been deputed). Unfortunately, for them this notional limit of Rs 6,500 doesn’t apply. “If an employer has expat workers, there is a higher likelihood of their being subject to scrutiny by PF authorities,” adds Iyer.
A similar matter is up for interpretation before the Supreme Court, but until then, PF authorities are likely to commence audits and raise demands on India Inc, based on the circular