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New Social Security Rules for International Workers

18 Sep 2011

The Ministry of Labour and Employment made fundamental changes to the social security rules in India and, specifically, to the "Employees' Provident Fund" ("EPF") with effect from 1 October 2008.

The scope of the scheme was broadened to compulsorily cover International Workers ("IWs") under the purview of India's social security regime. This has resulted in considerable unrest in the business and expatriate communities, since businesses and expatriates would each have to pay 12% of the expatriate's "salary" as employer and employee social security contributions, respectively. "Salary" for the purposes of the legislation has been defined as including basic wages, dearness allowance, retention allowance, and cash value of food concession.

The initial version of the scheme that was notified in 2008 suffered from a fair degree of legislative ambiguity which was, to a large extent, clarified by subsequent amendments and Frequently Asked Questions (FAQs). Taxand India describes the key features of the scheme as it stands today.

The scope of the current rules covers IWs who have been defined as including any Indian employee (holding or entitled to hold an Indian passport and employed by an establishment covered under the PF Act) who works or has worked abroad in a country with which India has entered into a bilateral social security agreement (an "SSA" is a bilateral instrument for protecting the social security interests of workers posted to another country), or a foreign national working in India in an establishment where the Employees Provident Fund and Miscellaneous Provisions Act 1952 is applicable ("EPF &MP Act"). The EPF scheme is mandatorily applicable to all Indian establishments having 20 or more employees.

Accordingly, every IW employed by an establishment in India to which the EPF & MP Act applies would be required to join the EPF scheme, unless he/she qualifies as an "Excluded Employee". "Excluded Employee" has been clarified as covering a "Detached IW" contributing to the social security programme of the home country and certified as such by a Detachment Certificate for a specified period under the terms of the bilateral SSA signed between that country and India. However, expatriates employed directly by an Indian establishment would be covered and would not be eligible for the benefit of detachment under an SSA.

Moreover, the current legislation does not prescribe any minimum period of employment in India to be eligible for making such contributions to the EPF scheme. IWs drawing salary in any currency and in any manner are covered. Also, the provisions of the scheme would be applicable irrespective of where salary is paid and even in the case of employees having responsibilities for other countries in addition to India; contribution is to be made on the total "salary", covering responsibilities outside India as well.

A recent amendment to the legislation has further aggravated the hardship since IWs from countries not covered by an SSA will not be eligible to withdraw accumulated balances in their EPF account before attaining the age of 58 years or on prescribed medical grounds. In other words IWs having contributed to Indian social security may become eligible to withdraw their accumulations before attaining 58 years of age as per the terms of the SSA applicable to term.

Therefore, existing IWs from countries not covered by an SSA and who have made substantial social security contributions will have to wait for a considerable period of time before gaining access to their contributions. Further the cash hit is likely to fall entirely on employers, who typically agree to compensate their expatriate staff with a net in-hand salary.

Taxand's Take

Attempts to restructure the Indian social security scheme and put it on a par with the social security schemes of various countries have been made during the past 2-3 years. However such attempts have resulted in a massive increase in the cost of retaining expatriates in India, which, in turn, has placed an immense burden on businesses, adding to their hardship, and is likely to impact forthcoming international assignments. Since most countries do not allow social security benefits to be exported, the amended scheme may have a positive impact on Indian nationals working abroad, as they may no longer be required to contribute to the social security schemes of the countries with which India has an SSA.

To date, only five SSAs with Belgium, Germany, Switzerland, France and Luxembourg have taken effect . Apart from this, SSAs have been signed with the Netherlands, the Czech Republic, Denmark, Hungary, Norway and the Republic of Korea, but have yet to take effect. Negotiations are at various stages with Canada, Quebec, Sweden, Australia, the US and Austria. Further, Government-level talks are underway with many other countries where sizable numbers of Indian workers are employed.

Many countries will be queuing up in the near future to sign SSAs with India, as it is the only way to achieve lower Indian social security costs.

There are two primary upsides to this:

1. Under the current regime, an expatriate employee who was earlier most likely to get covered under the Indian social security scheme, may now have chance to qualify as "Excluded employee" as per the terms of the SSA between India and his home country. As a result of which he may be excluded from the Indian social security provisions and would thus be required to contribute only to his home country's social security scheme.

2. Even in a situation where the expatriate employee has contributed to Indian social security scheme, he may become eligible to withdraw his PF accumulations before attaining 58 years of age as per the terms of the SSA applicable to him.

Your Taxand contact for further queries is:
Nitin Baijal
T. +91 124 339 5018

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