India | Employment Tax | Special provisions applicable to international workers under the EPF and EPS schemes are unconstitutional and arbitrary: Karnataka High Court

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India | Special provisions applicable to international workers under the EPF and EPS schemes are unconstitutional and arbitrary: Karnataka High Court

Summary

In a recent judgment, the Hon’ble Karnataka High Court (HC) has struck down the special provisions introduced in October 2008 for International Workers (IWs) under the Employees’ Provident Fund Scheme (EPF) and Employees’ Pension Scheme (EPS) considering them to be unconstitutional and arbitrary. The HC has held that these special provisions are violative of Article 14 of the Constitution of India as they are discriminatory in nature.

The detail

In October 2008, the Government of India made EPF and EPS mandatory for cross border workers by introducing a new category of employees, ‘International Worker’, within the ambit of the Employees Provident Fund and Miscellaneous Provisions Act, 1952 (PF Act). Prior to this amendment, such workers were not required to contribute to these schemes as they qualified as ‘excluded employees’ having salary more than the threshold limit of INR 6,500 (as applicable at that time).

Under these provisions introduced, IWs are required to contribute on their gross salary (including salary paid outside India), unlike their Indian counterparts who continue to be subject to the salary ceiling applicable for contribution (presently the salary cap is INR 15,000 per month). There is an exception for IWs coming from countries with which India has an operational social security agreement (SSA countries) provided they continue contributions in their home country and obtained certificate of coverage (COC), resulting in them qualifying as ‘detached workers’. Furthermore, IWs from SSA countries are allowed to withdraw their accumulated funds under EPF upon ceasing to be an employee of the covered establishment in India. However, IWs from non-SSA countries are permitted to withdraw their dues only upon attaining the age of 58 years or ceasing to be an employee of the covered establishment, whichever is later.

Issue before the HC

Whether introduction of para 83 of EPF Scheme and para 43A of EPS Scheme (special provisions for IWs) is unconstitutional under Article 14 of the Constitution of India.

Petitioners’ contentions

The key arguments submitted by the Petitioners are as follows:

• The provisions of Para 83 under the EPF Scheme and Para 43A of the EPS Scheme are arbitrary and discriminatory and hit by Article 14 of the Constitution of India which provides for equality before the law and equal protection to all.
• IWs are covered under the EPF scheme irrespective of salary drawn, whereas domestic workers who draw monthly salary exceeding the prescribed statutory ceiling (now INR 15,000 per month) may opt out of from the purview of the Scheme.
• IWs normally do not work till the age of retirement in India but only for a limited period, therefore, causing them to contribute on the entire global salary would cause irreparable
• Para 83 introduced in the Scheme is violative of para 2(f) of the PF Act “excluded employee” and violative of the PF Act for the reasons that:
  1. The Act provides for coverage of the weaker sections where there is a wage ceiling limit
  2. No wage ceiling limit has been provided for IWs, which is in contravention to the PF Act
  3. Heavy burden is on the employer

• At no point of time was the PF Act intended to cover high-ranking officials and therefore, any amendment to the Scheme must be done within the framework of statutory provisions of the PF Act.
• Under these provisions, foreign nationals, who are holding higher positions like consultants and technicians drawing several lakhs of salary per month with high perks are brought under the Scheme, which is not only arbitrary and illegal, but also unconstitutional as it is opposed to the very intendment and the object of the PF Act.
• A foreign citizen has a right to challenge the constitutional validity of a plenary legislation or subordinate legislation under Article 14 of the Constitution of India on the ground of discrimination, and under Article 21 of the Constitution of India on the ground of right to life.

Objections filed by the Union of India

The key objections submitted by the Union of India are as follows:

• The argument raised by the petitioners that a separate class created was discriminatory is not correct as special provisions have also been made previously in the law for different classes of employees such as Cine workers, Artisans, Person with disabilities, persons with Cerebral Palsy, Mental Retardation and Multiple Disabilities, etc. and therefore carving out a special category of employees as IW cannot be termed arbitrary.
• The Government of India has entered into several bilateral SSAs, effective on various dates, therefore the provisions of the EPF and EPS were required to be amended to extend the provisions to IWs.
• Indian workers posted overseas to non-SSA countries are required to contribute to the provisions of the host social security for which they were not entitled to any benefits since they were not rendering services for the eligible period required under the laws of such countries. To compensate for the loss, it was necessary to set up such reciprocal agreements to protect the interests of Indian workers.
• The Scheme is neither discriminative nor violative of Article 14 of the Constitution and by the process of classification, the State has the power to determine who should be regarded as a class for the purpose of legislation enacted on a particular subject.
• Considering the special status of IWs, and in order to fulfil international obligations, the Government of India has made special provisions for them, which is distinct from the other employees covered under the PF Act. The attack of the petitioners on the constitutional validity of the PF Act based on Article 14 is, therefore, unsustainable. The classification had a rational relation to the object sought to be achieved i.e., the amelioration of the condition of service of IWs, hence the provisions made in the scheme are neither arbitrary nor discriminatory.

The ruling of the HC

The Karnataka High Court struck down the special provisions applicable to IWs and termed them as unconstitutional and arbitrary and allowed the Writ Petitions. The key observations of the HC are as below:

• There is discrimination between the Indian employees working in a non-SSA country (who are not IWs as per definition) and foreign employees from a non-SSA country working in India (who are classified as IWs). There is neither a rational basis for this classification nor reciprocity that compels classification of foreign employees from non-SSA countries as IWs. The respondents have not stated whether the Indian employees working in non-SSA countries are required to contribute on their entire pay without statutory limit towards PF (social security) of that In the absence of parity as well as absence of reciprocity, there is no justification to demand a contribution on the entire pay of a foreign employee from a non-SSA country.
• The introduction of para 80 and 81 under the Scheme in respect of working journalists and Cine employees cannot be equated with bringing IWs under the EPF Scheme, as they were introduced for a specific reason. For example, in the case of working journalists, considering the fact that they had to undergo a lot of risk on duty, the said amendment was made.
• Non-citizen employees working in India and employees who are Indian citizens when working in India are equal. However, under the provisions for IWs, they are two different classes for some reason, resulting in equals being treated differently which violates Article 14. The law must be enforced and administered equally among those who are Hence, the classification made is unreasonable, does not have intelligible differentia and there is no presence of nexus between the objective of the PF Act and the basis of classification.
• The provisions are discriminatory for IWs in comparison to domestic employees as there is no salary limit for IWs (in contrast to domestic employees). This is in contravention to the original understanding for which the provisions were introduced in the PF Act, resulting in higher burden for the employer.
• Though the special provisions for IWs were introduced in the Scheme, no corresponding changes were made in the Act, thus rendering these provisions as inoperative.
• The intention of the EPF and EPS Act was to ensure compulsory coverage for weaker sections of society and was not intended to include high ranking officials, consultants and technicians drawing high Hence, the introduction of these provisions for IWs is not only arbitrary and illegal but also unconstitutional as it is opposed to the very object of the PF Act.

Takeaways

This is a major development, pronounced after 16 years of the introduction of these special provisions, calling them as ‘unconstitutional and arbitrary’ and struck down by the HC. Over this long tenure, several other related regulations have been introduced, such as the rules and protocols for withdrawal, taxation of employer and employee contributions, SSA protocols with several countries, etc. It is also expected that this verdict might get challenged before a larger bench of the HC or even in the Supreme Court of India. In due course, there will be several related issues to be considered viz. how the PF authorities will settle the contributions already collected from IWs, or how the tax collected on higher employer/employee contributions will be treated if the judgment is sustained. All stakeholders should keep a close watch on future developments in this space till this reaches its finality, to understand and reassess the impact of these changes for their IW compliances.

Contact us

For a deeper discussion on the above, please reach out to your Vialto Partners point of contact, or alternatively:

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India Lead/ Mumbai

Ravi Jain
Partner, Bengaluru / Kolkata

Sundeep Agarwal
Partner, Mumbai

Anand Dhelia
Partner, Bengaluru / Hyderabad

Chander Talreja
Partner, Delhi NCR

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Partner, Mumbai/ Pune

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