Strapline: Employers and employees alike are wary of the November 30th circular from the office of the Central Provident Fund Commissioner. Deepshikha Thakur brings you the low down on what it’s all about and why it’s become controversial

1 p.m. in the office cafeteria: Disha is a finance professional working in a leading MNC. Her lunch has been rendered bland and tasteless by the new PF circular. “If I understand it correctly, PF will be deducted on total monthly take home, and not the basic as it is currently being done. So that means we will have a smaller take-home. As it is, increments do not match inflation. And this – surely we can manage our finances? Does the government have to decide it for us,” asks a visibly upset Disha.

3 p.m. in the CEO’s office - The CEO and CFO call for an urgent meeting with the Head-HR. “What is this circular about? How likely is it to get implemented? We are already struggling to meet our bottom line. We cannot afford to have increased employee costs. What is your plan?” asks the CFO. “Neither can we have our employees take the burden -- it does not reflect well on our employee brand,” affirms the CEO.

4:30 pm in the union office - “How can they make such changes in the procedure without even consulting us? We are not going to accept it at any cost,” asserts the union leader.

On November 30, 2012, the former Central Provident Fund Commissioner (CPFC) RC Mishra issued a circular that directs employers to club all the allowances paid to employees along with the Basic component of their salary, when calculating the PF deductions. It also redefines the process of assessment and inquiry for companies defaulting on PF contributions. Though the order has been put on hold for now, pending further orders from the new CPFC, Ravi Mathur, it has generated heated discussions across the HR community.

Understanding the circular:
Reduced take home salary: The circular states that all allowances which are uniformly paid to the employees are to be treated as basic wages. At present, the ‘basic’ is only a fraction of the total CTC (cost to the company), and employees and employers contribute 12 per cent of the basic salary each to the PF. If the circular gets implemented, all other allowances which are paid on a monthly basis will be included for PF calculation. This would result in a reduced take home for employees despite increased cost to company. If the employer contribution is a part of the employee’s CTC, the impact would be even more. (See Table)

Scenario 1: Assuming employer contribution is not a part of the fixed CTC 

The employer and employee contribution to PF increases by 150 per cent each, the total CTC increases by 7 per cent, and the net take-home decreases by 8 per cent if the circular is implemented in its current form. The impact could have minor variations on the basis of what percentage of the CTC is taken as the basic. Also, the net take-home is subject to tax deductions.

Scenario 2: Assuming employer contribution is a part of the fixed CTC

The employer and employee contribution to PF increases by 150 per cent each, the net take-home decreases by 16 per cent if the circular is implemented in its current form. The impact could have minor variations on the basis of what percentage of CTC is taken as the basic. Also, the net take home is subject to tax deductions.

Hari Parmeshwar, an independent expert on labour and business laws, believes that the inclusion of allowances for calculation of PF deduction is in line with the recent judgments by Supreme Court, and is beneficial to employees in the long run. However, Kamal Karanth, Managing Director, Kelly Services India, is not sure whether companies can actually implement it. He says “It’s a great move provided it is timed well, because internationally, there is only one salary, and the entire social security is pegged on that. However, there is a practical issue here: Because most organisations have multiple components, and if overnight they are forced to pay a contribution on the complete package as it is stipulated now, their employee costs will rise. In the current state of the economy, no company can actually take this burden.”

Initiation of inquiry and assessment process for organizations defaulting on PF: Another aspect of the circular simplifies the inquiry and assessment process for organizations defaulting on PF. It states that inquiries against defaulting companies should be initiated only after actionable and verifiable information is placed for consideration of the compliance officers, and that no inquiry or investigation should ordinarily go beyond seven years. Trade unions have termed this move as anti-worker.

Parmeshwar too finds this illogical. He says, “Any inquiry or investigation should continue till it reaches closure. There cannot be a time limitation to any investigation or inquiry.” However, Dr. Santosh Mehrotra, Director General, Institute of Applied Manpower Research (IAMR), an autonomous research institution of the Planning Commission, has a different take. “To me, the seven year cap is a matter of administrative convenience and not an absolute cut-off. In other words, there are cases in which the administrator of the fund is allowed to go back beyond seven years, if a reasonable case is made. So the seven year cut-off doesn’t seem to be an inordinately important matter.”

As Mehrotra affirms, “The splitting of wages is in the interest of the employer, and adversely affects the interest of the employee. The government is thus acting on behalf of the employee.” The circular was originally issued to arrest the growing trend among some employers to lessen their burden on PF contribution by splitting the basic salary into various contributions and therefore bringing down their contribution.
It also intended to make the inquiry and assessment process more transparent, fair and effective. However it had to be put on hold because it created unwarranted controversy, apparently because of the timing (it was issued on the last day of work of the outgoing PF commissioner), and also because it leaves many questions unanswered. For now the status quo continues, and only time will tell what’s in store.

deepshikha.thakur@peoplematters.in