As India slipped on the Forbes Tax Misery & Reform Index 2009 for imposing social security benefits on ?international workers?, the affected employers are still running around for clarifications, six months after the rule was notified. Some are having a rethink about bringing in expat talents into the country.

The rule says multinational companies have to deduct 12% of their staff salaries towards provident fund and make a matching contribution. The government move was aimed at building diplomatic pressure on the rest of the world to sign bilateral social security pacts with India. So, effective October 1, 2008, companies hiring international workers faced a bigger financial burden, even if these workers were contributing towards social security schemes in their home countries.

MNCs and firms hiring expats have been crying foul since. ?Companies are going to think hard before they send expatriate employees to India. In today?s downturn, when things are already costly, it (the PF contribution) further hikes the cost of operations. Sectors like aviation, retail and hospitality, where there is a dearth of homegrown talent and often foreign workers are called to the country, could suffer,? said Amitabh Singh, tax partner, Ernst and Young.

The coverage of foreign workers under the Employees Provident Fund Organisation (EPFO) has also created administrative hurdles for firms. When EPFO norms for international workers were notified, many regional provident fund officials were unaware of it and refused to accept applications of firms for registering their expat employees, recalled a Mumbai-based retirement fund advisor.

?Initially, there were a lot of teething troubles and some amount of ambiguity still remains. Questions on whether the entire salary of an international worker is subject to EPFO guidelines and whether the contribution can be withdrawn once the worker leaves the country keep cropping up,? said Singh.

?EPFO has tried to answer some ?frequently asked questions? on its Website, but companies are still struggling, as these guidelines are not clear enough. Moreover, even those workers who hail from countries that have signed social security pacts with India are required to contribute to PF now?, said Amit Gopal, vice-president, India Life Asset Management Company.

Central PF commissioner K Chandramauli was unavailable for comment.

Though Germany, Belgium and France have signed social security agreements with India, expat workers from these countries still have to pay PF in India as the Centre is yet to notify the ?date of effect? for these pacts. For several years now, India has been pursuing bilateral pacts with major economies to ensure that Indian workers retirement fund contributions in those countries can be brought back when they return home. For instance, 80,000-odd ?detached workers? from India working on consultancy and onsite assignments in the US contribute $1.5 billion to the US Social Security Fund annually.

While India was ranked 35 th on the Forbes Tax Misery & Reform Index in 2008, it jumped 12 places in 2009, thanks to what Forbes called ?expansion of social security charges.? India recorded the highest jump on the misery index by 24 points. This annual compilation by Forbes magazine is the sum of corporate tax, personal income tax, wealth tax, social security coverage and value added tax at the highest marginal rate in each country. The index aims to reflect a country?s ability to attract capital and talent through its tax regime?so the higher placed a country is, the harsher are its tax laws.

?Since the mandatory provident fund coverage adds to the cost of operations for companies with foreign workers, it can be considered as a tax,? notes a sectoral expert.

Year 2009-10 could unleash more tax misery on companies, even if the tax rates remain unchanged. A spate of court judgments like those on Vodafone and Sony Entertainment have clarified grey areas on tax liabilities of foreign companies and strengthened the revenue department?s position to tax such firms. Most recently, the Supreme Court ruling has said tax will have to be deducted at source in India on the salaries of expat employees of foreign companies working in India.

With tax revenues on the decline, the revenue department is expected to take a tough stand on this to boost collections. Tax consultants say the department will issue more assessment orders and demand notices to companies.