Do international employees still have to make EPF contributions after Karnataka High Court ruling?
Puneet Gupta
Tax Partner, EY India
In a recent ruling by the Karnataka High Court on April 25, 2024, the special provisions for 'International Workers' under the Indian Employees Provident Fund law were struck down as unconstitutional and arbitrary. These special provisions for international workers were first notified by the Central Government on October 1, 2008 through the introduction of Paragraph 83 in the Employees' Provident Funds Scheme, 1952 ('EPF Scheme') and Para 43A in the Employees' Pension Scheme, 1995 ('EPS').
Who is an international worker as per EPF Scheme?
An international worker in the EPF Scheme is defined as an individual having a foreign passport and working for an employer in India to which the EPF Scheme applies.Laws for international workers under EPF Scheme
Special provisions applicable to international workers under the EPF Scheme are as follows:1. Mandatory coverage as members under the EPF Scheme, irrespective of the basic salary amount (except where covered under a Social Security Agreement / Bilateral Comprehensive Economic Agreement signed by India with the worker's home country). India has entered into Social Security Agreements with 20 countries including Belgium, Germany, Australia, Canada, Japan, etc. and Bilateral Comprehensive Economic Agreement with Singapore.
2. Provident Fund contributions to be made @ 12% of basic salary and most allowances (such as conveyance allowance, host country allowance, hardship allowance, etc.), without any ceiling on contributions by employer or employee. Hence, if an international worker joins EPF scheme with basic salary of Rs 500,000, then he/she will be required to join the scheme and contribution to EPF account will be made on actual salary without any restrictions. As against the 'no restrictions' on international workers contributions, remember, there are certain limits on contribution for domestic workers.
3. Provident Fund accumulations can be withdrawn only on retirement after attainment of 58 years of age (unless covered under a Social Security Agreement or retirement is on account of permanent and total incapacity for work). Remember, international workers cannot withdraw EPF and EPS after two months of leaving job whereas domestic workers can do so.
Here's an example to understand this: If a foreign passport holder employee works in India for say 4 years (i.e., from 36 years of age till 40 years of age) - 24% of his salary (12% employee + 12% employer) for each of the 4 years would be contributed into the Employees Provident Fund account with the EPFO or Private Trust maintained by the employer, which the employee will not be able to access for another 18 years even after leaving India.
Different rules for international and domestic workers
More than 15 years after the introduction of 'International Worker' provisions in the EPF Scheme, the Karnataka High Court has now struck down these special provisions for international workers and held them to be arbitrary and violative of Article 14 of the Constitution of India which prescribes 'equality before law'. The Court took a view that Article 14 equally applies to foreigners working in India and equal protection should be given to foreigners before the law. The notified provisions for international workers were held to be discriminatory in nature on the following key grounds:a. For coverage under the Provident Fund Scheme: A domestic worker with basic salary exceeding Rs 15,000 per month is not mandatorily required to join the Provident Fund Scheme. However, the same threshold does not apply to international workers.
b. For contributions under the Provident Fund law: A domestic worker is required to contribute on basic salary up to Rs 15,000 per month whereas an international worker is made to contribute on the entire salary. For a domestic worker, contribution on salary exceeding Rs 15,000 is optional.
The Court also observed that the provisions for international workers were not in alignment with the aims and objects of Provident Fund law - which is to provide retirement benefit to employees in lower income bracket and hence Para 83 of the Employees' Provident Fund Scheme and Para 43A of Employees' Pension Scheme were struck down as incompatible, arbitrary, unconstitutional and ultra vires.
Impact of court ruling on international workers' EPF contributions
The Ministry of Labour & Employment in its statement on May 7, 2024 said that EPFO is actively evaluating the future course of action in response to this judgement. As per media reports, EPFO is likely to challenge this judgement .Until the matter is finally decided, organisations may continue to deposit the EPF contributions to ensure compliance with the international worker provisions, unless specific guidance / instructions to the contrary are provided by the Employees' Provident Fund Organisation ('EPFO'). Alternatively, organisations may consider other options such as filing writ petition against the order etc.
However, if the ruling is ultimately upheld, it may have far reaching implications for international workers and employers. International workers will not be required to contribute towards India's Employees' Provident Fund and any past contributions deposited may have to be refunded by the EPFO along with applicable interest . Further, any recoveries of past contributions (which had not been made i.e. not contributed) pertaining to international workers made by the EPFO from employers pursuant to litigation / inspections in this matter may also need to be refunded.
Since the High Court has entirely struck down the provisions inserted in October 2008 as unconstitutional, it may have effect from October 2008 (i.e., retrospectively), subject to further clarity that may come up from the Courts / EPFO.
(The author is Tax Partner, EY India)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
This story originally appeared on: India Times - Author:Faqs of Insurances
