Provident fund for the international workers

In 2008,Government made fundamental changes to the Provident Fund scheme and introduced a new category called international workers

In 2008,Government made fundamental changes to the Provident Fund (PF) scheme and introduced a new category called international workers (IWs). The corporate world across the board raised concerns about the changes. Due to the lack of clear guidelines,a host of questions were raised by foreign nationals working in India and their employers. Since then the Provident Fund authority has issued regular clarifications in order to remove various anomalies related to the applicability of this scheme to IWs. However,some questions remain unanswered. One significant question,to which expatriates working in India and their employers require clarification from the PF regulators,is —

What is the meaning of the term total salary for the purposes of contributions to the Provident Fund?

The amended scheme requires IWs and their employers to contribute 12 per cent of their monthly pay,which includes basic wages,dearness allowance (DA) (including the cash value of any food concessions) and retaining allowance. According to the Employees Provident Funds And Miscellaneous Provisions Act,1952,the term basic wages includes all emoluments which are paid or payable in cash to an employee in accordance with the terms of employment while on duty or on leave but it does not include the following:

* Cash value of any food concession.

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* Any DA,house-rent allowance,overtime allowance,bonus,commission or any other similar allowance

* Any gifts provided by the employer.

The plain reading of this definition suggests that it has been designed to cover allowances or payments generally received by local employees from their employers. However,the compensation structure for expatriates varies from that of local employees. Expatriates receive allowances/ benefits such as cost of living allowance (COLA),hardship allowa-nce,an assignment premium,housing benefits,tax equalisation payments or other reimbursements etc.

Although,COLA is somewhat similar to DA and should therefore be included in the monthly pay when calculating contributions,the other allowances/ reimbursements/ benefits might not be included as it can be contested that these are not in the nature of basic wages or other allowances on which PF contributions are payable.

In the absence of clear guidelines,companies are left with no option but to examine the components provided to their expatriate employees and to compare these with the parameters applied to local employees. There have been a number of PF rulings but none of them has specifically addressed expatriate compensation.

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The manner of calculating the salary on which contributions are to be based is also contentious as current PF regulations do not address the complex employment arrangements relating to the cross-border movement of employees. For example,Mr. X has responsibilities in multiple countries and spends 60 per cent of his time in India and 40 per cent of his time outside India. Accordingly,he offers his salary pertaining to the period in which services were rendered in India (60 per cent) to Indian taxation.

The question arises whether the total salary (100 per cent) will be considered in the PF calculation,in light of the explanations offered by the latest FAQs released by the PF authority,or whether only the salary offered for taxation will be considered.

The PF authorities need to come out with clear and detailed guidelines as to what constitutes salary when calculating PF contributions.

Tax & Regulatory Service,PwC India