Karnataka HC ruling: Why Centre should cap international workers’ EPF contributions

The central government must revisit Employees' Provident Fund (EPF) provisions for international workers in light of the Karnataka HC's verdict

The Karnataka High Court (HC) recently struck down certain provisions that put international workers (IWs) within the ambit of the employees' provident fund and pension scheme, terming them unconstitutional, arbitrary and against the objective and intent of the Employees' Provident Fund and Miscellaneous Provisions Act, 1952.

International workers are usually at a disadvantage as they are mandatorily required to contribute to the provident fund on their full salaries. That is, unless they obtain a certificate of coverage from their home country if it has a social security agreement (SSA country) in place with India.

International workers do not enjoy certain EPF benefits

In contrast, Indian employees earning a monthly salary of more than Rs 15,000 are not mandated to become members and contribute to EPF. Also, international workers (from non-SSA countries) can withdraw their accumulated EPF balance upon attaining 58 years of age, whereas for Indian employees, withdrawals are permitted in certain circumstances even before retirement.

The HC has observed that non-citizen employees working in India and employees who are citizens of India are two different classes, but when working in India, they are equals. Yet, they are treated differently, and hence, this violates Article 14 of the Constitution of India (right to equality).

This ruling is a single order passed on the 23 petitions filed before the Karnataka HC, which were combined, as the issues were common. There may be petitions lying pending in other high courts as well on the same issue and this legal battle is not over yet.

Further, the union government is likely to challenge this ruling in the Supreme Court.

Need for separate legislation

Irrespective of the outcome, the government could look into the possibility of enacting provisions for IWs through a separate statute.

The EPFO has released a statement saying that it will actively evaluate the course of action on this ruling. However, there is now perhaps an opportunity to relook at the provisions pertaining to international workers.

As India aspires to be a global manufacturing hub, it may have to hire resources with skill sets that may not be available in India and even in countries with which India has signed SSAs. Hiring of non-SSA country nationals such as those from the US or the UK is too expensive, as Indian employers normally bear the cost of the social security for such IWs.

The cost is not just 24 percent of basic salary (i.e., the employer’s and employee’s share of contribution) but much higher due to consequent tax liability on the contributions. This is also on account of contrasting statutes—one statute i.e., PF, mandates the employer and employee to contribute a higher amount (by computing such contributions on gross pay), while another statute i.e., the Income Tax Act, levies tax on employers' contributions exceeding Rs 7.5 lakh in a financial year.

Also read: Explained: All about how your EPF contributions above Rs 2.5 lakh would be taxed

PF withdrawal hurdles for international workers

IWs who have at least a couple of years before they are eligible to do so, find it difficult or nearly impossible to practically withdraw their PF accumulations. They are unable to continue holding an Indian bank account (as it is expensive to maintain) to realise the provident fund money. Due to tighter KYC norms of banks, they are unable to open new bank accounts in India when their withdrawal becomes due upon attaining 58 years of age.

Until the withdrawal happens, the EPFO continues to pay interest on these PF accumulations as these accounts do not become inoperative. The return that the EPFO provides is better than the market rate and that puts pressure on its resources. It is not clear what purpose is served by paying high returns to international workers.

Cap contributions, ease withdrawal process for foreign workers

Observers say the government should consider putting a cap on the maximum contributions to be made by international workers, in line with the global practices and social security programmes of other territories. Even the withdrawal process needs to be smoothened and simplified to build confidence among international workers that they will get their money back.

India has SSAs with 21 countries and hiring foreign nationals even from these countries is not free from challenges. In cases where foreign nationals continue to contribute to their home country's social security and obtain the certificate of coverage, it may pose a challenge from Indian tax perspective for an overseas employer with a business presence in India through such employees.

Given all these complexities, it would be prudent for the authorities to revisit the existing provident fund regulations for international workers and align them with the provisions of other applicable Indian regulations.