On February 28th, the Supreme Court passed a judgment settling many pending disputes between Employers and therefore the EPFO attempting to deal with the question on what's Salary for the needs of computing PF contribution. It held that the contracted salary is that the basis for PF with the exception of House Rent Allowance (HRA). Any component which has variability for instance Overtime Allowance, Production Incentive, Bonus, Attendance Incentive, Conveyance Allowance, Vehicle reimbursements, Telephone Reimbursements, etc which is decided on certain performance conditions or supported specific circumstances are excluded from PF computation. within the case of say Conveyance Allowance which is provided as a typical amount to all or any employees may then be considered as Salary for PF. Therefore, the inclusion or exclusion of which allowance or component of salary for PF also will need the appliance of mind on whether it's the salary for PF or not supported the circumstances of every case.
How much of Employee Welfare? This essence of this ruling is to safeguard the future welfare interests especially of these lower wage level employees whose salary is below Rs 15,000/- a month and to guard their interests against employers attempting to introduce this Special Allowance head which during a sense is Mischievous Allowance to scale back the PF contribution of the Employer and thereby reduce its costs. However, with compensation lately being negotiated and widely accepted on a price to Company (CTC) basis the appliance of the ruling at an equivalent CTC for these lower wage level workers (say with Basic Salary of Rs.10,000, HRA of Rs.4,000 plus Special Allowance of Rs.5,000; Total Gross Rs.19,000) may actually actually be squeezed by almost Rs 1,200 a month and now compelled to form future PF savings which they'll ill afford. Of course, the impact may vary amongst different worker segments. Those with families to support may now find that the small that they earned and took home to be further reduced consequently to the present Supreme Court judgment. It becomes a moot question on whether this ruling is actually a welfare measure during a CTC has driven HR market place.
Additional cost – to take care of Take-Home equivalence If Employers were to take care of an equivalent Net take-home of those employees who hitherto had a lower PF thanks to the existence of a Special Allowance, the extra cost to the organization would now be Rs 1,200/- per month for a Salary of Rs19,000 per month, a rise of seven .23%. it'd be possible to limit the impact by restricting the salary for PF computations to Rs.15,000 just in case the essential plus Special Allowance is quite Rs.15,000. See table below as an illustration with various scenarios of Basic Salary but with an equivalent gross salary of Rs.19,000 pm. The shortfall of revised net take-home on previous net take-home might be anywhere between 1% to 11% counting on the composition of the essential salary and special allowance
No Change for Higher Income Employees For those employees whose basic salary is in more than Rs 15,000/- there would be no obligation for Employers to form a further PF contribution albeit that they had a Special Allowance. However, they'll either eliminate the Special/Mischievous Allowance in their pay structure and roll it up into Basic Salary or maybe prefer to continue with the Special Allowance and exclude an equivalent . However, this might cause additional cost on gratuity, leave encashment and other retirement benefits as they're going to be computed on the essential salary. Hence, the pay structure could also be retained because it is but the salary for PF computations may require to be modified to incorporate Basic + Special Allowance. The considerations would be the collective choice of those groups of Employees with the HR and management of the corporate .
Does this ruling have retroactive applicability? As is clear during this judgment there has been much litigation between Employers and therefore the EPFO in various courts and levels of the courts on this question with some variations within the facts of every case on Special Allowance and the way this is often determined from one case to a different . The Supreme Court ruling is dated February 28th, 2019. The question then arises on what happens to all or any the past contributions where Special Allowance as a part of the pay structure for workers earning below Rs 15,000/- per month and lower contributions were made. Do Employers now need to re-compute and cough up additional contributions to the PF Department? If so to what particular backdate. What happens as regards those employees who have already left their services? Also what happens to the extra PF contribution of the workers share, would they need to recover it from them? What if the old employees don't have UAN, which is now mandatory to submit the returns? Will, there be any interest and penalties for delay in payment of those dues and PF department coerce the businesses to recover these dues by issuing prosecution notices to the businesses and its Directors? These questions remain consequent to the ruling and therefore the PF Department would had best to issue a notification to deal with these open questions.
Recommendations to Government It is being perceived that margins of the businesses , particularly MSMEs, are becoming eroded thanks to economic process within the recent past. It this point , if an amendment of PF rules results in additional burden on both employer and employees generally , it could hit the industry heavily, which is already reeling under heavy burden thanks to demonetization, GST, rigors of continuous tweaking compliance requirements concerning Companies Act, etc. this might again cause more unemployment, which is already under stress, and will affect the very purpose of improving employee welfare generally , which is being intended to bypassing this judgment. the govt should devise some scheme to soak up the extra cost by way of subsidy, a minimum of for MSME companies.
Central Government is proactively taking many measures towards simple doing business in India. it's also recommended that the effective date of implementation should be made prospective to limit the challenges to deal with the various issues that would crop-up now thanks to this judgment. Otherwise, implementation of the scheme itself will become untenable for the industry.
For More Details You Can Contact Employees' State Insurance or ESI Consultant in India
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