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Social security & new breed of international workers

Posted by Manish Agrawal on Tuesday, 9 December, 2008

Historical Background: Sometimes it is essential to understand the historical context even in the context of taxes. With the objective of providing social security coverage to the working population of independent India, the Provident Fund Act (PF Act) was introduced way back in 1952. The basic purpose of its introduction was to provide a blanket to the employee during retirement or to his or her dependents in case of the employee’s early demise. The spirit of the legislation was to inculcate the habit of saving.
The PF Act applies to all factories and establishment notified by the Central Government which employ 20 or more workers. Every employee working in such an establishment is required to make a 12% contribution of his ‘pay’ [i.e. basic wage, dearness allowance (including cash value of food concession) and retaining allowance] to the PF account. In addition, the employer is also required to make a matching contribution of 12% to the said account. An, an employee earning more than the specified amount of salary (presently Rs 6,500 per month) is excluded from the purview of PF Act but has an option to voluntarily contribute to PF. 

As a result of this, foreign nationals coming to work in India were excluded from the purview of the PF Act as their salary, in almost all cases, was in excess of Rs. 6,500 per month. However, when an Indian national was sent to work overseas, there was no such exemption available to him in the foreign country and he, in most cases, was necessarily required to contribute to the Social Security fund of the foreign country, irrespective of the time spent by him in the other country. 

Further, on returning back to India, the amount so contributed to foreign country Social Security fund was forfeited in most cases, depending on the withdrawal rules of the other country. This resulted in lot of hardship and financial loss to both individuals and to the employer companies since in most cases the contributions were funded by the employer companies. Amendment to the PF rules 
To plug the gap, the Indian Government has taken a step forward by bringing in an amendment in the PF Rules with effect from October 1, 2008. The amendment has created a new class of employees known as the International Worker. 

The International Worker has been defined to include person holding a non-India passport and working for an establishment in India, which is covered by the PF Act. It also includes Indian employees going to work in a country with which India has a Social Security agreement. 

The objective of bringing the amendment is to create a level playing field for Indiansworking overseas. The amendment has changed the definition of excluded employee and now even if an International Worker is earning salary of more than Rs 6,500 per month, he is required to contribute to the PF in India. However, if there is a Social Security agreement between India and the home country of the International Worker and if such International Worker continues to contribute to the Social Security fund of his home country, such International Worker is excluded from the provisions of amended PF rules and is exempt from making PF contributions in India. 

Similarly, in case of an Indian national who goes to work overseas to a country with which India has a Social Security agreement, no contribution is required to be made by the deputed employee in the foreign country so long as PF contributions are made in India. 

It should however be noted, that the recent amendments have not changed other provisions of the PF Act in relation to refund, penalties, contribution etc. Accordingly, before an International Worker is required to contribute to the PF in India, the basic test (of notified establishment and twenty or more employees working in an establishment) are required to be satisfied. International Workers will be included while counting the number of employees for determining the applicability of the PF Act. In case the basic test is met, the International Worker would be required to make a 12% contribution of his or her ‘pay’ to the PF in India along with a matching 12% contribution by his or her employer. International Workers covered by the new amendments have to mandatorily become members of a PF in India with effect from November 1, 2008 and contribute to such fund. 

To illustrate, John Ding an American passport holder is deputed to work in X-soft Ltd in India. X-soft Ltd. employs more than 100 employees on October 1, 2008 and is covered by the PF Act. Effective November 1, 2008, John Ding is mandatorily required to contribute to a PF in India even though his salary is more than Rs 6,500 per month as there is no social security agreement currently in place between India and the United States of America. 

India has till date signed Social Security agreements with Belgium, France and Germany. What is interesting to note is that even though the Social Security agreement has been signed with these countries, the same have not been notified as being “entered into force”, thereby, rendering them ineffective. Hence, International Workers from these countries are still required to contribute to a PF in India. 
Further, negotiations are on with Bahrain, Czech Republic, Norway, The Netherlands, Oman, Switzerland and Sweden for introduction of Social Security agreements. 

Many questions arise, which require further clarity. It is not clear what constitutes ‘pay’ for International Workers. This question is very important since International Workers get paid a number of allowances while being seconded to India. It is also not clear whether the amended provisions are applicable to the individuals coming to work in India on short term business trips, whether PF rules will apply if the payroll is maintained outside India, to name a few instances. 

The amendment is a step in the right direction by the Government of India as it is bound to pave way for Government of other countries to come to the negotiation table and enter into Social Security agreement providing reciprocal benefits. This would enable Indians contributing to Social Security funds in foreign countries to enjoy portability of Social Security benefits irrespective of the country they work in. 



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