Revamping the obsolete

One of India's most draconian laws is around Provident Fund (PF), governed by the Employees' Provident Fund and Miscellaneous Provisions Act, 1952 (PF Act), and is the most mandatory among all statutory compliances. It is strictly interpreted, to the extent that some courts have held that not even an iota of subterfuge is acceptable under PF laws. Age-old laws need modifications as they act as major roadblocks deterring foreign entities from investing in India.

Some of the expensive litigations involve Provident Fund liabilities. In the event of losing such litigation, companies are required to pay employees' share, employers' share with interest, damages, etc. It is an emolument that exists in the salary package of most employees and is a widely used term.

Corporates frequently employ camouflage or subterfuge in salary structures for years together to reduce PF liabilities. This is due to a misinterpretation of provisions, which ultimately leads to higher payments at a later stage rather than savings. All such disguises result in significant retrospective liabilities and must be avoided.

PF constitutes 12 per cent of an employee's salary, which is contributed to the Provident Fund authorities, and an equivalent amount is contributed by the employer. The PF Act includes schemes such as the PF Scheme, EDLI scheme, pension scheme, among others. It applies to all types of employment, whether permanent, fixed-term, on probation, temporary, casual, daily wager, or even through a contractor. In the case of an employee employed through a contractor, it is the principal employer's responsibility to ensure that PF is deducted and deposited. In the event of the contractor's failure, the principal employer needs to deposit the amount which it may, however, recover it from the contractor as per the terms of the contract.

According to the amendment in 2008 under the PF Act, it is also applicable to international workers. Indians seconded abroad and employees without an Indian passport who are deputed to work in India are classified as "international workers" under the statute. While for Indian employees, there is a salary cap of Rs. 15,000 for applicability and deposition limit, no such limit exists for international workers. In cases where there are existing social security agreements, known as totalization agreements, with countries to which employees are being sent, there would be detachment from the provisions for the stipulated period.

Some of the lesser-known facts about PF laws are that if an employer wishes, they can restrict PF contributions up to an amount of Rs. 15,000/- or any other limit as prescribed by the legislature. Some firms end up paying excessive amounts towards PF, unaware of these provisions under the PF Scheme. In the case of a new employee joining an organization, whose salary exceeds Rs 15,000/- and is not a member of the PF Fund or has withdrawn their previously deposited PF, they may be excluded from the PF coverage.

PF is deposited with authorities such as the Regional Provident Fund Commissioner. If an establishment desires, it can have its own exempted trust for PF and invest the money in permitted securities. However, this can be done only after seeking exemption from the government. The pertinent condition for this is that the company must provide equivalent or better benefits as provided under the Act. Employees have the option to withdraw PF at the time of quitting their service. Unlike gratuity, which can be forfeited in cases of misconduct such as moral turpitude or financial loss, PF cannot be forfeited under any circumstance.

One of the most prevalent issues faced by industries currently is determining which salary components should PF be deposited upon. PF is not to be deducted from all components. Basic and DA, by their very nature and nomenclature, are included. However, HRA is excluded. Ambiguity arises for allowances such as special allowance, conveyance allowance, assignment allowance, travel allowance, flexi basket, etc. The nature of the allowance needs to be considered, not just its name. Various court judgments have been passed in this regard, considering factors such as the payment format and uniformity.

Non-compliance with PF regulations can have serious consequences. It can lead to damages, interest, and even prosecution in rare cases. Even in situations where a company is undergoing insolvency or bankruptcy proceedings or is closed down, PF dues must be given priority and complied with.

The legislature should reconsider this law and make it more commensurate with today's economic circumstances. A more simplified tax, social security, and fringe benefit regime would undoubtedly make it more lucrative for attracting overseas investments.

The writer is a practising Advocate in Supreme Court and High Court of Delhi. Views expressed are personal