A recent circular issued by the Employees? Provident Fund Organisation (EPFO), based on a 2011 Supreme Court ruling, provides relief to employers from making PF contributions on wages in excess of the statutory wage limit of R6,500 per month.
Each month, employers deduct 12% of employees? wages, match them with an equal amount and invest them in PF on employees? behalf. Although R6,500 per month is the statutory wage limit on which such PF contributions are to be computed, both employer and employee have the option to make contributions on wages in excess of R6,500 per month.
There has always been debate on whether employers and employees who have opted to contribute on the entire basic wage can later restrict PF contributions to only on wages of up to R6,500.
The reason for this debate is a provision under the PF law that doesn?t allow employers to reduce the PF benefit, which the employee is entitled to under the terms of his/her employment (express or implied).
In 2011, the Supreme Court held that an employer who is contributing to PF on wages in excess of the statutory wage limit may, at any time, discontinue it. That is, the employer cannot be compelled to contribute on wages in excess of the statutory limit.
The court also agreed with the view of High Court in the case that the provision of the law, which does not allow an employer to reduce an employee?s PF benefits, will only operate as a bar where there is a prior agreement with the employee to contribute on full wages.
The EPFO, in its circular issued on 27 May 2014, confirmed it will not challenge the 2011 SC ruling. EPFO has also directed its regional offices not to force employers to contribute on wages in excess of the statutory ceiling. The 2011 SC ruling and the EPFO circular are
not applicable for ?international workers? as there is no
statutory wage limit applicable to them.
The circular comes as a welcome move as it is expected to settle the long-pending debate. This will especially help Indian employers who send employees on overseas assignments. Such employers are generally required to contribute to the host country’s social security, leading to significant additional costs.
Such employers may now opt to limit the PF contribution on wages up to R6,500, which will allow employees? continued PF benefits (though at reduced rates), and will not result in excessive costs for employers.
Such PF contributions will also enable employees to obtain a certificate of coverage in India (where India has a social security agreement with the host country) and claim exemption from the host country.
However, employers are not allowed to reduce contributions in cases where higher contributions have been agreed upon with employees. The latest announcement brings some relief for Indian companies that are sending employees overseas, and are keen to provide continued PF benefits to them without any serious cost pressure.
The writer is senior tax professional with EY.
Views expressed are personal