pwc - indian social security for cross border assignments october 2011-130112

8/12/2019 PwC - Indian Social Security for Cross Border Assignments October 2011-130112

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Indian social security For cross-border assignments

www.pwc.com/india

October 2011


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ForewordForeign assignments are often challenging because they involve not only entering into anew tax system but also negotiating the social security structure in the country in question.Every country has its own set of social security regulations for employees working within itsterritory. India introduced compulsory social security regulations for cross border workersfor the rst time in October 2008. These regulations are still evolving and the authoritieshave issued several clari cations since their introduction. This guide is designed to helpemployers and cross border workers understand:

the social security system in India and its various compliance requirements;

the bene ts available under social security agreements; and other matters which need to be kept in view.

This booklet contains details of the social security law and practice in India currentlyapplicable to cross border workers, compiled by a team of specialists within thePricewaterhouseCoopers, International Assignment Services (IAS) practice. We invite you to contact us for further details. Our specialists will be pleased to provide advice andassistance tailored to your speci c requirements.

Addresses of PricewaterhouseCoopers of ces in India are provided in Appendix D of thispublication.

Kaushik Mukerjee LeaderInternational Assignment ServicesPwC India

Kuldip Kumar Executive Director PwC India


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Section 1The Indian social security system for cross border workers


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Introduction

The Indian social securitysystem provides retirement andinsurance bene ts to employees working in factories or otherestablishments covered by thesystem, in India. The systemis governed by the EmployeesProvident Fund and Miscellaneous

Provisions Act 1952 (PF Act) andthe schemes made there under,namely, the Employees ProvidentFund Scheme (EPF) and theEmployees Pension Scheme(EPS). The Employees ProvidentFund Organisation (EPFO), astatutory body established by thegovernment of India, administersthe social security regulations inIndia.

Scope Every establishment in India,employing 20 or more personsis required to register with thesocial security authorities unlessthey are an exempt establishment.

An establishment employing lessthan 20 persons can voluntarilyopt to register with the authoritiesfor the welfare of its employees.Upon voluntarily registration, the

provisions of the Indian socialsecurity regulations apply inexactly the same way as if suchregistration were mandatory.

In October 2008, the governmentof India made the social securityscheme mandatory for crossborder workers by introducinga new category of employee,international worker, within the

ambit of the EPF and EPS. Priorto this amendment, such workersused to qualify for exclusion fromthe provisions of the Indian socialsecurity regulations and werenot subject to the Indian socialsecurity system.

International worker

A foreign national quali es asan international worker, ifhe/she is coming to work foran establishment in India to which the Indian social securityregulations apply.

Similarly, an Indian nationalquali es as an international worker, if he/she has worked oris going to work in a country with which India has entered into asocial security agreement (SSA)and is eligible to avail him /herselfof the bene ts under the socialsecurity programme of the hostcountry, according to the terms ofthe relevant SSA.

Exemption

An international worker isexempted from Indian socialsecurity regulations where heor she:

(a) is from a country with whichIndia has a reciprocal SSA;and

(b) is contributing to his/herhome countrys socialsecurity, either as a citizen orresident; and

(c) he or she enjoys the statusof detached worker for theperiod, and according tothe terms, speci ed in therelevant SSA.

Contributions

An international worker is requiredto contribute 12% of his/her salaryto the social security system. Theterm salary is broad and coversbasic wages (all emoluments paidor payable in cash while on dutyor on leave/holiday), dearnessallowance, retaining allowanceand cash value of any foodconcessions. However, house rentallowance, overtime allowance,bonus, commission or any othersimilar allowance or presents areexcluded from the salary gure

used to calculate contributions.Employers are required to deductthe social security contributionfrom the employees monthly payand, after making a matchingcontribution of 12%, to deposit thesum with the Indian social securityauthorities/ fund by the 20th dayof the following month. A ve daygrace period is included withinthis time limit.

Contributions are payable on thefull salary where an international worker is on a split payroll. Forconverting foreign salary guresinto the equivalent INR, the monthend telegraphic transfer buyingexchange rate, as published by theState Bank of India, is to be used.

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Employers contributions to Indiansocial security are not taxablein the hands of international workers. In relation to their owncontributions, international workers can claim a deduction ofup to INR 100,000per annum from their taxableincome in India.

Allocation of contributionsFrom the employers 12%contribution, an amount equal to8.33% of the salary is allocated tothe international workers pensionfund and the remaining amount isallocated to the provident fund.

The employees entire contributionof 12% is allocated to theprovident fund.

The accumulated balance in theprovident fund earns interest at aspeci ed rate, which is announcedby the government from time totime. The government announceda 9.5% rate of interest for the year2010-11.

Interest that accrues onaccumulated contributions(employers as well as employees)is exempt from tax.

Withdrawal bene tsThe EPF and the EPS providedetailed rules for withdrawalbene ts.

Provident fund

An international worker can withdraw their accumulatedbalance in the provident fund inthe following circumstances:

Retirement from service inthe establishment or afterattaining 58 years of age, whichever is later.

Retirement on accountof permanent and totalincapacity to work due tobodily or mental in rmityas certi ed by a prescribed

medical of cer/registeredpractitioner,

When suffering from certaindiseases detailed in the termsof the scheme,

According to the provisionsspeci ed in the relevantSSA which covers theinternational worker.

In cases where the international

worker is from an SSA country, withdrawal from the providentfund must be carried out accordingto the terms of the relevant SSA.In all other cases, the amount withdrawn will be credited to theinternational workers Indian bankaccount. Amendments have beenmade in the Indian regulatoryframework to permit international workers to open Indian bankaccounts in order to realiseprovident fund money.

Any lump sum withdrawn byinternational workers fromtheir provident fund accounton retirement or otherwise,after completing ve years ofcontinuous service in a coveredestablishment in India or underother speci ed circumstances, isexempt from tax.

In all other cases, the employerscontribution and interest earnedon that contribution (both onthe employer and employeesshare) is taxable in the year of withdrawal. Furthermore, wherean international worker availedof any deduction for his/her owncontribution during the past years,

such deduction shall be taxable inthe year in which it is withdrawn.

Pension fund

Accumulated sums in the pensionfund are used to pay a pension toemployees upon retirement or incertain circumstances as speci edin the EPS. International workersare not permitted to withdrawfrom the pension fund unless theyhave rendered eligible service for

a period of ten years. However, where international workers arecovered under an SSA, withdrawalis possible earlier.

The monthly pension receivedfrom the pension fund onretirement is taxable asemployment income. However,commutation of pension paymentsare exempt from tax, subject to thefollowing conditions:

In cases of a receipt ofgratuity, the commuted valueof one third of the pension isexempt from tax.

In other cases, the commuted value of one half of thepension is exempt from tax.


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Section 2Bene ts of social security agreements


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SSAs are bilateral agreementsbetween India and other countriesdesigned to protect the interestsof cross border workers. Theyprovide for avoidance of nocoverage or double coverageand equality of treatment of the workers of both countries. ASSA generally provides for thefollowing:

(a) Detachment: Applies toemployees posted to theother country providedthey comply with the socialsecurity requirements of theirhome country.

(b) Exportability of pension: Provision for payment ofpension bene ts directly without any reduction to the

bene ciary choosing to residein his/ her home country orany other country.

(c) Totalisation of bene ts: Theperiod of service rendered ina foreign country is counted when determining eligibilityfor bene ts. Bene ts arelinked to the length of service,on a pro rata basis.

India has entered into SSAs with11 countries, as listed in Appendix A. The government of India iscurrently negotiating SSAs witha number of other countries,including Sweden, the USA,Canada, Australia, and Japan.

As at the current date, onlythe agreements with Belgium,Germany, Switzerland,Luxembourg and France areoperational. The other agreementshave not yet come into force.

Certi cates of coverage(Detachment)

A certi cate of coverage (COC),otherwise known as a detachmentcerti cate must be obtained byan international worker to avoiddouble coverage. A COC willbe issued by the workers homecountrys social security authorityin accordance with the provisionsof the relevant SSA. The COCserves as a proof of detachmenton the basis of which exemptionfrom social security contributions

or social security taxes in thehost country are available forthe period of detachment. Forexample, a German nationalcan apply for a COC from theGerman social security authoritiesbefore being deputed to India to work with an establishment to which the Indian social securityregulations apply. This will exempthim/her from contributing toIndian social security for theperiod stated in the COC.

Period covered by COC

The period covered by the COCdepends on the period of theinternational workers assignmentto the other country. Themaximum duration for which theCOC can be issued depends on theterms provided in the SSA withthe international workers home

country. For instance, in the caseof the India Germany SSA, themaximum duration for which theCOC can be issued is 48 months.



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Section 3Compliance requirements


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Employers obligations

Employers are under a legalobligation to deduct thecontributions and remit them with the Indian social securityauthorities within the speci edtime frame, as explained in theprevious section.

Employers are required to le aForm (IW-1) to report details oftheir international workers on amonthly basis. A Nil return mustbe led in cases where there isno movement of international workers. Employers are alsorequired to le monthly return(12A) and annual return (Form6A and 3A) within the prescribedtime frame.

Interest for non payment/ short payment

Where any employer fails to remita contribution or makes shortremittance of any contributionto the Indian social securityauthorities/ fund, interest at therate of 12% per annum is payablefrom the date on which the

amount became due till the date ofactual payment.

Non compliance penalties

Levy of damages

Where any employer makesa default in their payment ofcontributions to the fund, a defaultin their transfer of accumulations,or a default in their payment ofapplicable charges, the CentralProvident Fund Commissionermay recover from the employer, by way of penalty, damages at therates given in Appendix B.

Other consequences

In addition to the levy of damagesdetailed above, the employerand/or any other person may bepenalised/ prosecuted where thatemployer and/or person commitsany of the offences summarised

in Appendix B. An opportunityof being heard is provided beforeany penalty is imposed and/orprosecution is initiated by theauthorities.

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Section 4Other matters


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Equalisation policies

The social security regulations aredesigned to protect the welfareof employees. Under the Indiansocial security regulations it isillegal to enter into an agreement with employees to reduce theirsalaries in order to providesocial security bene ts and/or

otherwise to recover/claim thesocial security bene ts fromemployees. Employers need to becareful particularly where foreignnationals are covered under theequalisation policies and mayrequire to de ne the processappropriately to avoid any legal violation in India.

Tax and other considerations

Obtaining a COC may helpto optimise social securitycontributions, but it may also havetax rami cations in India. Thepresence of foreign nationals asemployees of a foreign companymay result in a permanentestablishment risk for the foreigncompany. Assignments needs tobe structured and documentedappropriately to keep in viewsocial security, income tax, and

regulatory considerations, in orderto be compliant with Indian law.


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Appendix ASocial security agreements

Sl. No. Name of countries Status

1 Belgium Operational from 1 September 2009

2 Germany Operational from 1 October 2009

3 Switzerland Operational from 29 January 2011

4 Luxembourg Operational from 1 June 2011

5 France Operational from 1 July 2011

6 Netherlands Signed on 22 October 2009. Not yet operational.

7 Denmark Signed on 17 February 2010. Not yet operational.

8 Hungary Signed on 3 February 2010. Not yet operational.

9 The Czech Republic Signed on 8 June 2010. Not yet operational.

10 Korea Signed on 19 October 2010. Not yet operational.

11 Norway Signed on 29 October 2010. Not yet operational.

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Appendix BNon compliance penalties

Period of default Rate of damage *(% of arrears per annum)

Less than two months 5%

Two months and above but less than four months 10%Four months and above but less than six months 15%

Six months and above 25%

* The damages shall be calculated to the nearest rupee and are levied simultaneously along with interest fornon payment or short payment of contributions as explained above.

Rates of damages

Nature of offence Personliable

Consequences

Default in relation to the payment of contributions (or

administration charges or inspection charges) towardsthe provident fund according to the provisions of thePF Act.

Employer Where the default is in relation to payment of the

employees contribution which has already beendeducted by the employer from the employees wages. Imprisonment for a minimum term ofone year (which may be extended to three years)together with a ne of INR 10,000.

For all other cases Imprisonment for a minimumterm of six months (which may be extended tothree years) together with a ne of INR 5,000.

Default in relation to the payment of contributions(or inspection charges) towards the Deposit linkedInsurance scheme.

Employer Imprisonment for a term not less than six months which may be extended to one year and a ne ofup to INR 5,000.

Making a false statement or misrepresentation to avoidany payment towards the provident fund, pension fundor deposit linked insurance fund.

Any person Imprisonment up to one year or ne of INR 5,000or both.

Contravention/default in complying with any of theprovisions.

Any person Imprisonment for up to one year or ne of up to INR4,000 or both.

Contravention/default in complying with anyprovision of the PF Act where no other penalty isprovided elsewhere in relation to that non compliance.

Any person Imprisonment for a term not less than one month which may be extended up to six months and a neof up to INR 5,000.

Penalties and prosecution


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Appendix C Important contact details and useful web links

Head of ce

Bhavishya Nidhi Bhawan,14, Bhikaiji Cama Place,New Delhi 110 066

Central Provident Fund CommissionerPhone: 011 26172671Email: cpfc@ep ndia.gov.in

Regional Provident Fund Commissioner(International Workers Unit)Phone: 011 26172668Email: rc.iwcell@ep ndia.gov.in

Useful links

Employees Provident Fund Organisation (EPFO) www.ep ndia.com

Ministry of Labour, Government of India www.labour.nic.in

Ministry of Overseas Indian Affairs, Government of India www.moia.gov.in

Frequently Asked Questions (FAQ)http://www.ep ndia.com/faq_IntWorker.pdf

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BangaloreMillenia, Tower D, 6th Floor1&2 Murphy Road

Ulsoor, Bangalore 560 008Tel : +91 80 4079 6002Fax : +91 80 4079 6222Contact Person: Kaushik MukerjeeEmail: [email protected]

Delhi NCR Building No. 10, Tower C17th & 18th Floor, DLF Cyber City,Gurgaon, Haryana 122002Tel: +91 124 330 6000Fax: +91 124 330 6999

Contact Person: Kuldip KumarEmail: [email protected]

MumbaiPwC House, Plot 18/A Guru Nanak Road (Station Road),Bandra (West)Mumbai 400 050Tel: +91 22 66891000Fax: +91 22 66891888Contact Person: Nikhil BhatiaEmail: [email protected]

AhmedabadPresident Plaza, Ist FloorOpposite Muktidham DerasarS.G. Highway, Thaltej Ahmedabad 380 054Tel: +91 79 30917000Fax: +91 79 29090007Contact Person: Mayur DesaiEmail: [email protected]

KolkataPlot No. Y 14, Sector V,Salt Lake Electronics Complex,

Bidhan Nagar, Kolkata 700 091Tel: +91 33 2357 9100/2357 3384Fax: +91 33 2357 3394Contact Person: Somnath Ballav Email: [email protected]

Hyderabad# 8 2 293/82/A/1131A Road No. 36Jubilee Hills, Hyderabad 500034Tel: +91 40 66246600Fax: +91 040 66246400

Contact Person: R. D. HingwalaEmail: [email protected]

Chennai32, Khader Nawaz Khan RoadNungambakkam,Chennai 600 006Tel: +91 44 4228 5000Fax: +91 44 4228 5100Contact Person: K VenkatachalamEmail: [email protected]

Pune

GF 02, Tower CPanchshil Tech Park Don Bosco Road, YerwadaPune 411 006Tel: +91 20 4100 4444Fax: +91 20 4100 4599Contact Person: Sandip MukherjeeEmail: [email protected]

Appendix DContacts



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PwC rms help organisations andindividuals create the value theyrelooking for. Were a network

of rms in 158 countries withclose to 169,000 people who arecommitted to delivering qualityin assurance, tax and advisoryservices. Tell us what matters to you and nd out more by visitingus at www.pwc.com.

In India, PwC (www.pwc.com/India) offers a comprehensiveportfolio of Advisory and Tax &Regulatory services; each, in turn,

presents a basket of nely de neddeliverables. Network rms ofPwC in India also provide servicesin Assurance as per the relevantrules and regulations in India.

Providing organisations withthe advice they need, whereverthey may be located, ourhighly quali ed, experienced

professionals, who have soundknowledge of the Indianbusiness environment, listen to

different points of view to helporganisations solve their businessissues and identify and maximisethe opportunities they seek. Ourindustry specialisation allows us tohelp co-create solutions with ourclients for their sector of interest.

We are located in these cities: Ahmedabad, Bangalore,Bhubaneshwar, Chennai, DelhiNCR, Hyderabad, Kolkata,

Mumbai and Pune.

About PwC


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Kuldip KumarExecutive [email protected]: +91 (124) 3306516

Sundeep Agarwal Associate [email protected]: +91 (22) 66891330

Vikas [email protected]: +91 (124) 3306794

Contributors:


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www.pwc.com/india

This publication does not constitute professional advice. The information in this publication has been obtained or derived from sourcesbelieved by PricewaterhouseCoopers Private Limited (PwCPL) to be reliable but PwCPL does not represent that this information isaccurate or complete. Any opinions or estimates contained in this publication represent the judgment of PwCPL at this time and aresubject to change without notice. Readers of this publication are advised to seek their own professional advice before taking any courseof action or decision, for which they are entirely responsible, based on the contents of this publication. PwCPL neither accepts orassumes any responsibility or liability to any reader of this publication in respect of the information contained within it or for any decisionsreaders may take or decide not to or fail to take.

2011 PricewaterhouseCoopers Private Limited. All rights reserved. In this document, PwC refers to PricewaterhouseCoopers PrivateLimited (a limited liability company in India), which is a member rm of PricewaterhouseCoopers International Limited (PwCIL), eachmember rm of which is a separate legal entity.

NJ 238 October 2011 Social Security.inddDesigned by: PwC Brand and Communications, India

pwc - indian social security for cross border assignments october 2011-130112

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