UncategorizedReduction in Contribution to the Provident Fund – 14 FAQs

May 22, 20200
RELIEF MEASURES IN PURVIEW OF COVID-19
MINISTRY OF LABOUR & EMPLOYMENT- 19th MAY, 2020
INTRODUCTION
The whole world has been affected by the spread of the novel corona virus. It is as if the world economy has been brought to a standstill as we are forced to stay indoors. India has now entered Lockdown 4.0.
Due to the adverse effects of COVID-19 on the economy, the Government has released several relief measures to increase liquidity in the economy. Prominent measures have been announced pertaining to the Employee’s Provident Fund Scheme.
  • Pradhan Mantri Garib Kalyan Yojna
On 10.04.2020 the Ministry of Finance introduced the Pradhan Mantri Garib Kalyan Yojna (PMGKY). This was introduced with a motive of giving upfront benefits to the employers having upto 100 employees and where 90% of their employees are getting wages less than Rs. 15,000/-. Under this scheme, the Government shall directly pay the entire employees EPF contributions (12% of basic wages) and employers’ EPF & EPS contribution (12% of basic wages), totalling to 24% of the monthly wages for the months of March, April and May, 2020, in the EPF accounts of employees.
  • Aatma Nirbhar (Self-Reliant) Scheme
The Ministry of Finance announced certain economic relief packages under the Aatma-Nirbhar (or Self reliant) Movement on 13.05.2020. For the welfare of the people, and with an aim to increase the liquidity in the hands of the employees, the Ministry of Finance announced that the rate of contribution to the Employee’s Provident Fund, for both employers and employees, shall be reduced from the existing 12% to 10% of basic wages for the Months of May, June and July in the year 2020. However, Central Public Sector Enterprises and state Public Sector Units (PSUs) will, continue to contribute 12% as employer’s contribution towards Employee’s Provident Fund.
Under the economic relief packages announced on 13.05.2020, the benefits of the PMKGY Scheme, pertaining to Provident Fund contribution of 24% by the Government, has been extended for a further period of June, July and August, 2020.
 
  • Amendment Dated 18.05.2020 in The Provident Fund Rules
The Labour Ministry has notified new rules that allow for reduced employees’ provident fund contribution for three months i.e. May, June and July, 2020. A notification was published by the Ministry of Labour and Employment in the Official Gazette bearing F. No. S-35019/01/2020-SS-II on 18.05.2020 which amended the Notification no. S.O.320 (E) issued by the Ministry of Labour and Employment on 09.04.1997.
This has led to widespread confusion in the trade as to the applicability and interpretation of the amendment. We have attempted to bring some clarity to the issue by answering the following FAQs.
FREQUENTLY ASKED QUESTIONS
1. What is the aim of the amendment dated 18.05.2020?
Answer: The aim of this amendment is to increase the liquidity in the hands of
  1. the employers and
  2. the employees.
It was brought into effect in exercise of the powers conferred by first proviso to Section 6 of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952.
The proviso to Section 6 read as under:
“Provided that in its application to any establishment or class of establishments which the Central Government, after making such inquiry as it deems fit, may, by notification in the Official Gazette specify, this section shall be subject to the modification that for the words “ten percent”, at both the places where they occur, the words “12 percent shall be substituted:”
The Gazette notification expresses the object behind the amendment as follows:
“Whereas due to Covid-19 pandemic, lockdown Is in force across the country and the Central Government after making necessary inquiry is satisfied that to provide liquidity in the hands of employers and employees, there arises a need to amend the notification of the Government of India in the Ministry of Labour published in the Gazette of India, Extraordinary, Part II, section 3, sub-section(ii) vide number S.O. 320(E), dated 9th April, 1997;”
2. Who are going to be impacted by this amendment?
Answer: The following shall be benefitted by this amendment also being termed as welfare legislation:

I. The Employers in the Private Sector that come within the ambit of Employee’s Provident Fund and Miscellaneous Provisions Act, 1952.

II. The Employees in all the enterprises that are covered within the ambit of the Employee’s Provident Fund and Miscellaneous Provisions Act, 1952.
 
3. What is the rate of the contribution to be made by the employer and employee?
Answer: The rates for contribution for employees and employers in different sectors are varied. The varied rates of contribution to the Employee’s Provident Fund are as follows:
I. The Employee’s contribution, in all Private and Public Sector Enterprises, to the Employee’s Provident Fund shall be at the rate of 10% of the basic Wage.
II. The Employer’s contribution to the Employee’s Provident Fund, for the enterprises in the private sector, shall be at the rate of 10% of the basic Wage.
III. The Employer’s contribution to the Employee’s Provident Fund, in the Central Public Sector Enterprises, the State Public Sector Enterprises and other enterprises owned by, or under the control of the Central or State Governments, shall be at the rate of 12% of the basic Wage.
 
4. Is this a permanent amendment? What is the time period for the applicability of this amendment?
Answer: This is not a permanent amendment. The amended rates of contribution shall be applicable only for the three months of May, June and July of the year 2020, as explicitly specified in the amendment.
The relevant part of the amendment notification is reproduced herein below:
“In the said notification, in SCHEDULE II, after clause (iv), the following clause shall be inserted, namely:-
“(v) Any establishment, other than Central Public Sector Enterprises and State Public Sector Enterprises and other establishments owned by, or under the control of the Central Government or the State Government, as the case may be, in respect of wages payable by it for the months of May, June and July, 2020”.
 
5. Are there any exceptions to the applicability of this amendment?
Answer: Yes. The notification has explicitly exempted the Central Public Sector Enterprises and State Public Sector Enterprises and other establishments owned by, or under the control of the Central Government or the State Government from this amendment.
For the aforementioned enterprises that have been exempted from the applicability of this amendment, the Employers shall continue to make contribution to the Employee’s Provident Fund at the rate of 12% of the basic wage.
Additionally, those enterprises that are gaining benefit by virtue of being covered in the ambit of the Pradhan Mantri Garib Kalyan Yojna whereby the Government shall be contributing the full amount of 24% (12% of the Employer and 12% of the Employee) of the basic wage toward contribution to the Employee’s Provident Fund, are also exempted from the benefit under this amendment.
 
6. Is there any change in the basic structure of the Employee’s Provident Fund Act, and Miscellaneous Provisions Act, 1952 by virtue of this amendment?
Answer: No, there is no change in the basic structure or mechanism of the Employee’s Provident Fund Act, and Miscellaneous Provisions Act, 1952 by virtue of this amendment dated 18.05.2020.
The object of this amendment is only to cater to the problem of lack of liquidity in the hands of the employees amidst the Pandemic scenario. Moreover, the applicability of this amendment is also for a limited and specific period of time, that is, the months of May, June and July, of the year 2020.
 
7. What will be the impact of this reduction of 2% in the Provident Fund contribution?
Answer: This amendment has reduced the rate of contribution to the Employee’s Provident Fund by 2%. This 2% of the basic wage is actually being paid by the employer to the employee directly with a motive to increase the liquidity in the hands of the employee.
Instead of making payment to the Fund for the benefit of the employee, the employer is now directly making payment to the employee. The employee is now the custodian of this amount of 2%.
At the Employer’s end, this reduction to 10% would ensure that the employer would have an extra liquidity of 2% which it is not required to pass on to the employees. Basically the reduction from the total of 24% to 20% would result in having liquidity of 4%, 2% out of which will go the employee while the remaining 2% will be retained by the employer.
This is being done in order to advance the government’s intention of providing liquidity in the hands of the both employers and employees
 
8. How will this reduced amount of 2% be treated by the Employer?
Answer: This reduced amount of 2% of the basic wage from the Employee’s contribution will be passed over to the employee as an amount towards the Provident Fund by the employer albeit in a different mechanism. The Employer’s share will be retained by it for maintaining liquidity to ensure smooth running of the business.
The only difference is of the mechanism through which the benefit is being passed on to the employee and the time period during which this benefit is being availed by the employee.
  1. Mechanism: Before the amendment, the mechanism of contribution of this 2% used to be the Provident Fund as established under the Employee’s Provident Fund Act, and Miscellaneous Provisions Act, 1952.
After the amendment this mechanism has been removed and the contribution thereof is made directly to the employee to enable increased liquidity in the employee’s hand. 
2. Time Period: Before the amendment, the employee could take benefit of this 2% amount (for the month of May, June and July, 2020) at the time of retirement, when this amount would be transferred to the employee with the rest of the funds in his Provident Fund Account.
However, by virtue of the amendment, this 2% amount (for the month of May, June and July, 2020) will be directly given to the employee for his disposal to fulfil the object of increasing liquidity in the hands of the employee.
 
9. Whether this reduction can be considered to be at par a voluntary withdrawal of funds from the Provident Fund by the Employee?
Answer: – No, this cannot be considered to be a voluntary withdrawal of funds by the employee. There is a separate mechanism of voluntary withdrawal of the amount in the provident fund under the following sections of the Employee’s Provident Fund Act, and Miscellaneous Provisions Act, 1952:
  • Section 68O – Payment of Withdrawal or Advance.
  • Section 69 – Circumstances under which accumulations in the fund are payable to a member.
Voluntary withdrawal of amount from the Provident fund can only be assumed where an act of deposit and then the employee makes an application for withdrawal exists in terms of the aforementioned sections.
The reduced rate of contribution cannot be considered as a withdrawal from the provident fund under the Act. This amendment simply requires the Employer to contribute the 2% of the reduced amount directly to the Employee instead of depositing the same in the Provident Fund.
 
10. Whether this reduction in the contribution to the Employee’s Provident Fund is related to or dependent upon employment contracts?
Answer: No, this change in the amount of the contribution is being made to the Provident Fund under the eanctment and hence it cannot be dependent upon the individual employment contracts between the employer and employee.
It is pertinent to note that this amendment has brought about a change in the law governing the Employee’s Provident Fund. Even though this amendment is for a stipulated period of time, its authority supersedes the authority of any contract between the employer and the employee. Such employment contract or any other contract shall have no locus standi against mandatory legal provisions being brought in force. Otherwise, such a change wil become redundant.
11. Is an employer barred from making a contribution of more than 10% to the Employee’s Provident Fund?
Answer: No, the amendment is actually meant for welfare and has been effected in welfare legislation with the motive of increasing liquidity in the hands of the employer and the employee for only a limited period of time and due to the sole reason of financial hardship of employers and employees due to Covid-19.
There is no prohibition against payment of a higher amount toward the Employee’s Provident Fund, voluntarily.
However, it is advisable that such increased contribution of more than 10% of the basic wage be made by the Employer to the Employee’s Provident Fund after getting written consent from the concerned employees. Such an act would not prejudice the rights of employer or the employee.
This also finds support from the Paragraph 26(6) read with Para 29 of the Employees Provident Funds Scheme, 1952 whereby for the employees, he/she can pay voluntary contribution up to Rs. 15,000 in excess of his normal contribution of 12%. The total contribution i.e., voluntary + mandatory can be up to Rs.15000/- per month. For contributions more than Rs. 15,000, permission from APFC/RPFC as per the provisions of para-26(6) of the Scheme has to be taken.
Hence, the entire welfare scheme has to be read in a harmonious manner to evolve its main objective and not to read in isolation.
12. Whether Income Tax would be collected on the 2% that is being given in the hands of the employees by the employer?
Answer:  There has been no amendment or specific provision pertaining to exemption of this 2% under the Income Tax Act, 1961. However, considering the intent and purport behind this welfare legislation, the Government should come up with a provision to exempt such an amount to meet the real intent and purport for which the entire amendment was given effect to.
It is also pertinent to note that the 2% is towards the component of Provident fund but its accounting under expense or provident fund or other head will make a difference.
13. Whether there can be any tax liability on employees on the withdrawal of Employees’ provided fund before a certain period?
Answer: Yes, withdrawal of amount of employees’ provident fund by the employees within 5 years of rendering continuous service with their employers are liable to Tax Deducted at Source (TDS) @ 10% under section 192A in terms of Rule 10A of Part A of Schedule Four of Income Tax Act, 1961.
14. What can be the impact on the employer if the contribution to the Employee’s Provident Fund is not made by the employer?
Answer: If an employer does not make the necessary contribution to the employee’s provident fund, the following actions can be taken against it:
  • Imprisonment and/or fine as per Section 14 of the EPF & MP Act, 1952,
  • Attachment and sale of its properties,
  • Attachment of Bank Accounts,
  • Action under Section 406/409 of Indian Penal Code (IPC) and Section 110 of Criminal Procedure Code (CrPC),
  • Realisation of dues from Debtors, 
  • Arrest and Detention of the Employer 

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