Each time the question of ?what to include? while calculating the employer?s contribution to the Provident Fund is raised, it leads to quite a debate. The biggest reason for this is the recent spate of court rulings and department circulars on the subject. Under the law governing the Provident Fund, an employer is required to contribute 12% of the employee?s monthly basic wage, dearness allowance and retaining allowance. The employee is required to make a matching contribution. Given that the term ?basic wage? is defined in the law itself, one may think that this should be the answer.
According to the law, basic wage means all emoluments paid in cash, but not house rent allowance, overtime allowance, bonus, commission or any other similar allowances and presents made by the employer.
There are two school of thoughts in this regard. One is the use of words ?all emoluments?, as the definition suggests that all components, except specified components, are included in basic wage. The other school of thought points to ?other similar allowances? in the definition as an exclusion, suggesting that most allowances are not included in basic wages.
Both the department and employers are keen on following the interpretation that suits them. Moreover, there has also been a long history of court rulings on this matter. Earlier this year, the Madhya Pradesh and Chennai high courts held that conveyance allowance and special allowance form a part of the basic wage.
The Provident Fund department also issued a circular to its officers requiring them to examine the pay structure of employees, to determine whether the pay is split into several heads to avoid Provident Fund contributions. In another case, the Punjab and Haryana High Court held that an employer can exclude house rent allowance, washing allowance and conveyance allowance from the basic wage. The court held that this cannot be said to be unjustified unless they are in complete deviation of the concept of the allowances sought to be under the definition of basic wage.
After this ruling, the department withdrew the earlier circular requiring its officers to examine the pay structure of employees. The department has also filed an appeal against the Punjab & Haryana HC ruling. The case is now pending in the court.
n The writer is senior tax professional, Ernst & Young
