EPFO acts on PM Modi's call to respect wealth creators, to halt wage structure inquiries

The Employees Provident Fund Organisation (EPFO) has asked its field offices to put a pause on roving inquiries into the wage structure of the establishments to see if certain allowances have not been treated as part of basic pay for EPF contributions. The move will provide relief to 12 lakh-plus establishments and factories that are covered under the Employees' Provident Fund and Miscellaneous Provisions Act, 1952.

In an internal circular issued on August 28, EPFO cited instances of field offices initiating inspection of three to four years records of establishments to make sure that the employers have not omitted any allowances from the basic pay while calculating the EPF contribution that needs to be paid by both the employer and the employee. "In all the cases where notices have been issued without any prima facie evidence of arbitrary bifurcation of wages with intention to avoid EPF liability, such notices should not be pursued further. Such actions amount to roving inquiries and investigations which is impermissible in law," the circular from the headquarters of EPFO said. It also warned erring officers of administrative action.

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It is known that the clarification came after industry associations complained of several such instances where field offices were quoting a Supreme Court judgment dated February 28, 2019 (which dismissed a set of petitions that challenged such actions taken by EPFO against the structuring of pay packages by several establishments) to carry out roving inquiries against firms.  

"We are delighted that the EPFO has taken a bold step to strengthen the MSME promoter and entrepreneur community across India. All India Manufacturers Organisation (AIMO) welcomes this landmark decision to ensure that fair and law abiding promoters are not harassed by certain unscrupulous officers for their personal gain," says K E Raghunathan, former President, AIMO.  According to him, the circular is in line with the announcement of Prime Minister Narendra Modi that all wealth creators will be treated with dignity and respect and end tax terrorism.

The EPFO circular insists that such investigations can be carried out by field offices after taking necessary permissions and following administrative guidelines in those cases where credible basis is available for forming a view that the employer was prima facie indulged in illegal practice of avoiding EPF liability by splitting basic wages.

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The Supreme Court on February 28 had dismissed the appeals made by Surya Roshni Ltd, U-Flex Ltd, Montage Enterprises Ltd and a transfer case by the management of Saint-Gobain Glass India Ltd against EPFO.  The SC had in its judgment noted that  appeals raise a common question of law, if the special allowances paid by an establishment to its employees would fall within the expression "basic wages" under Section 2(b) (ii) read with Section 6 of the Employees' Provident Fund and Miscellaneous Provisions Act, 1952 for computation of deduction towards Provident Fund and have therefore been heard together and are being disposed by a common order.

The Court had observed that the "wage structure and the components of salary have been examined on facts, both by the authority and the appellate authority under the Act, who have arrived at a factual conclusion that the allowances in question were essentially a part of the basic wage camouflaged as part of an allowance so as to avoid deduction and contribution accordingly to the provident fund on account of the employees. There is no occasion for us to interfere with the concurrent conclusions of facts. The appeals by the establishments therefore merit no interference," the verdict said.

The aggrieved parties have filed a review petition and the matter is pending for adjudication.

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