For international workers, PF challenges continue

In a surprise decision, the Karnataka High Court recently struck down provisions relating to International Workers, introduced in October 2008, as unconstitutional and arbitrary.
 
The International Worker (IW) provisions were introduced by the Central Government vide the Employees' Provident Funds Scheme, 1952 ('EPF Scheme') and the Employees' Pension Scheme, 1995.

As per these provisions, a foreign national working in an establishment in India to which the Provident Fund (PF) Act applies, is an International Worker.  Employees from countries with whom India has a Social Security Agreement (SSA), contributing to social security and holding a Certificate of Coverage (COC) issued by the social security authorities of such countries, are excluded from making PF contributions.

Further, Indian passport holders travelling to a country with which India has an effective SSA, were also classified as IWs. IWs face a restriction on withdrawal of accumulated balances.

IWs are required to contribute to PF without applying the threshold of Rs 15,000. Without the threshold of Rs 15,000, employees contribute to PF on almost the whole salary except allowances excluded as per the definition of wages under the EPF Act, leading to significantly higher contributions for foreign nationals working for Indian establishments, both by employer and employee. Just to clarify the point further, here is a brief table on the impact for IWs.

Particulars	Regular Employee	International Worker
Basic Salary	100,000	100,000
HRA	50,000	50,000
Special Allowance	110,000	110,000
Total compensation	260,000	260,000
PF wages	100,000	210,000
Employer contribution to PF	3,670	7,707
Employer contribution to Pension Fund	8,330	17,493
Employee contribution to PF	12,000	25,200

 
In the table, both the examples the employees are contributing to provident fund at 12% of the PF wages. However, for an IW the PF wages are higher as only HRA is the specifically excluded component. Thus, for IWs both the employer as well as the employee contribute a higher sum to PF which is withdrawable only after 59 years of age for an employee coming from a non-SSA country. Any non-compliance resulted in interest and huge penalties in addition to the outstanding dues.

Synopsys of the decision

Aggrieved by this Petitioners contested to strike down these provisions as they were ultra vires Article 14 of Constitution of India and were illegal as they opposed the objective of PF laws in India.

PF authorities argued they had the power to identify a particular class of people. The legislation’s intent was to negotiate bilateral agreements with foreign countries to provide relief to Indian nationals deputed outside India for short periods. Such individuals made contributions to the foreign social security and were unable to benefit as it required 10 years of contribution / benefits being available on retirement.

The petitioners also argued that the SSA is a bilateral instrument to protect the social security interests of workers posted overseas; as on date, 20 countries are covered, which is a small set of the population.

The Karnataka High Court, after considering the submissions, observed that while the legislators were within their power to create a specific class and frame rules, these have to adhere to the intention of PF regulations which is to support employees on retirement. Inclusion of IWs within the purview of PF requires huge contribution by the employer for high income earning IWs. The provisions also create discrimination between international workers of Indian and foreign origin. That being so, it is violation of Article 14 of the Constitution of India. The High Court struck down the validity of the provisions of the IW scheme on these grounds.

Implications of the decision

It may be noted that there is a contrary decision of the Mumbai High Court in the case of Sachin Desai where the Court ruled that IW provisions are not discriminatory. high Thus two courts have rendered contrary decisions. The current judgement has been pronounced by a single judge bench and hence it is anticipated that the EPFO would file an appeal before the divisional bench of the Karnataka High Court or before the SC. Hence, it is advisable for employers to closely watch the developments before initiating policy changes. This ruling has significant ramifications as it not only raises challenges on the future scope for PF, tax on withdrawals and the status of ongoing litigations, but also questions the veracity of SSAs.