Two recent rulings have started a debate on whether companies should include allowances in calculating provident fund (PF) liability or not. These allowances are in addition to the basic salary on which PF is generally calculated.
The PF law requires both employer and employee to contribute 12% of the salary to PF. Salary has been defined under the PF Act to include basic wages, dearness allowance (including cash value of food concession) and retaining allowance. The 12% has to be calculated on the total of the above. At the same time, it is also mentioned that salary doesn?t include rent allowance, overtime allowance, bonus, commission or any other similar allowances.
PF authorities usually contend that various salary components offered by the employer should be included while calculating the PF liability.
Earlier, the Supreme Court in two separate cases ? involving Bridge and Roof Company and Manipal Academy of Higher Education ? settled this debate by laying down the principle of universality. Under this principle, any salary component that is payable universally, necessarily and ordinarily in all concerns and is earned by all employees should be included for calculating PF liability.
Using the Supreme Court ruling, the Madhya Pradesh High Court in the case of Montage Enterprises recently held that conveyance and special allowance that was universally, necessarily and ordinarily paid to all the employees of a company have to be considered as a part of salary while calculating PF liability.
Thereafter, there was a Madras High Court decision in the case of Reynolds Pens India, which went ahead to include educational allowances, food concession, medical allowance, special holidays, night shift incentive and city compensatory allowance also as part of salary for calculating PF liability.
It is important to note here that the reason the PF department came down heavily on the companies was because the companies were paying basic salary to their workers in the form of various allowances to avoid PF liability. This ruling could affect many companies as these allowances are commonly provided to employees. Conveyance allowance is usually offered to employees at up to R800 per month and is exempt from tax. On the other hand, special allowance is usually the balancing figure. The other allowances mentioned are also provided as per industry norms.
Though the cases in the two high courts have been challenged and petitions filed to revise the orders, if the courts again pass a similar order, a petition can be filed with the Supreme Court. However, there will be no separate amendment in the PF Act to implement the clause.
With this ruling, many companies may need to review their compensation structure, striking a fine balance between minimising the employee?s tax liability and fully complying with PF laws.
The writer is director, tax and regulatory services, KPMG