Karnataka HC ruling on PF for expats: Companies can revisit compliance strategy, PF payments for such workers, say experts

Companies with expat employees in India may have to revisit the salary components and compliance strategies for these workers. The Karnataka High Court in a recent judgement struck down provisions relating to international workers in the Employees’ Provident Fund Scheme and the Employees’ Pension Scheme.

The provisions were introduced by the Central government in provisions through a notification dated October 1, 2008 through which it was made mandatory for international workers to contribute to the Provident Fund.

While welcoming the judgment, experts said that the matter may be appealed in the Supreme Court but said companies can review their compliance strategies.

'This is a single judge ruling and typically matters like this are referred to the larger bench of the High Court and / or the matter may travel to the Supreme Court of India. Until then, employers may analyse the impact of the ruling and devise their compliance strategy accordingly also considering the fact that similar writs are pending before other High Courts of the country,” said Puneet Gupta, Tax Partner, EY India.

Amit Agarwal, Partner, Nangia & Co LLP noted that the judgment would assist in reducing burdensome PF compliance for international workers (Expats). “The cash flow impact of the judgment on foreign expats and companies is very significant, as the EPF was earlier calculated and deposited on entire salary of foreign expats which sums ran into lakhs,” he said, adding that the refund of such amounts was another challenge which the expats had to face on their return to home country.

The Karnataka HC judgment upholds the principle of Equality as enshrined under Article 14 of the constitution, to the effect that Foreign Expats cannot be asked to pay EPF on their full salary when for Indian employees the limit is Rs 15,000 per month, he said.

In its ruling, the Karnataka High Court Karnataka struck down the special provisions for International Workers as unconstitutional and arbitrary. The EPF and Miscellaneous Provisions Act, 1952 was enacted to ensure that employees with lower salary brackets get retirement benefits. It cannot be held that employees who draw a higher salary should be given benefit under the law.

Relying on Article 14 of the Constitution of India which prescribes ‘equality before law’, the High Court also held that non-citizen employees working in India and employees who are citizens of India are 'equals’ when working in India.

It also noted that the demand for contribution on global salary that is the salary earned by an international worker from some other country or in home country is arbitrary and hit by Article 14 of the Constitution.