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SC verdict on provident fund contribution: Employers can still duck its full impact unless the government steps in

The Supreme Court verdict of 28 February 2019 in Regional Provident Fund Commissioner West Bengal v. Vivekananda Vidayamandir and others has reiterated the salutary principles of ascertaining components of salary that count for provident fund (PF) contribution by the employer and deduction from employees’ salary.

The Provident Fund Act says salary includes basic salary, dearness allowance (DA) and retainer allowance in case of seasonal establishments payable to permanent employees but excludes all other allowances and benefits. Thus overtime, house rent allowance etc stand excluded.

While this is simple enough, the problem arises when employers resort to creative payroll structuring. Vivekananda Vidyamandir did this by calling dearness allowance under the euphemism ‘special allowance’.

The idea was to exclude this special allowance from the purview of salary and thus reduce the employer’s contribution to the employees’ provident fund kitty. The apex court saw through the trick and held that if what is going to be forming part of the salary is camouflaged, the camouflaged would be pierced through. Thus it upheld the PF authorities’ contention that special allowance in the instant case was nothing but dearness allowance.

 SC verdict on provident fund contribution: Employers can still duck its full impact unless the government steps in

Representational image. Reuters

In other words, the nomenclature does not matter; what matters is the substance of the pay or allowance. Earlier the apex court had batted for the employees of Gestetner Duplicators Ltd by saying that when all the employees of the establishment were paid a low basic wage but correspondingly compensated with a commission on sales achieved across the board, such commission was indeed basic salary. PF is social welfare legislation, and trickery against employees must be seen through.

However, the implications of the verdict must be examined dispassionately without being carried away. Suppose an employee gets a basic salary of Rs 12,000 per month and a special allowance of Rs 8,000 per month (which is DA camouflaged as special salary) his salary for PF purposes is Rs 20,000 per month. 12 percent of this i.e. Rs 2,400 would be deducted and handed over to the PF authorities. Which means if earlier the employer was avoiding treating special allowance as part of the salary for PF purposes, he will have to do so now.

Earlier he would have deducted only 12 percent of Rs 12,000 i.e. Rs 1,440. Now he will have to deduct Rs 2,400. It may appear that the take-home salary of the employee has been reduced. Indeed it has been but his war chest for his post-retirement life has been strengthened. Mind the war chest earns interest.

What about the employer’s contribution? Well in the above example, the employer will wash his hands off of the salary exceeding Rs 15,000. So he is going to contribute only 12 percent of Rs 15,000 i.e. Rs 1,800 per month. This is because the PF Act mandates him to contribute on salary only up to Rs 15,000 per month. In this day and age, this sounds terribly anachronistic and caught in the time warp. The government should in the minimum double this immediately to Rs 30,000.

The long and short of the implications of the supreme court verdict is it is a shot in the arm for employees and a wake-up call to the government. All maneuvers by employers hitherto have been only to ward off their own contribution. It was only incidental that employees’ own contributions were also whittled down. The court judgment in the above example has got an Rs 8,000 implication, so to speak, for employees’ contribution, while the implication for employers’ contribution, as it were, is only Rs 3,000. The government must step in to close in the gap.

(The author is a senior columnist and tweets @smurlidharan)

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Updated Date: Mar 01, 2019 15:29:33 IST