Distinction or discrimination? Separate provident fund and pension law for international workers 

On 25th April 2024, The Karnataka HC arrived at a conclusion which may impact thousands of expats who, either are contributing or have contributed in the past to the Indian social security i.e., Provident Fund (PF) and Pension in India. 

The ruling addressed a very interesting subject – whether the existing separate provisions for International Workers (IWs) are discriminatory and unconstitutional. 

For any employee working in India, PF and pension cumulatively forms 24% of the monthly pay.  However, for an IW, this 24% is calculated on the gross monthly pay, unlike for Indian employee who has the option to limit the monthly pay to Rs. 15,000 for contribution. Adding to this, IW are not entitled to withdraw their PF accumulations until they turns 58 years of age and retire or is incapacitated etc. 

HC, in its recent ruling, has struck down this law whereby an IW is made to pay on gross pay, while an Indian employee can cap it on Rs. 15,000, as it is discriminatory and unconstitutional. 

The grievance of the petitioners was that as per the specific provisions in the PF and Pension Scheme (Para 83 in PF Scheme and Para 43A in Pension Scheme) , the IWs are covered under the PF and Pension scheme irrespective of the salary drawn by them and thus, have to contribute on the gross pay (without any cap). However, there is a salary ceiling of INR 15,000 per month for Indian employees. This has posed a huge burden for the employers and employees and is not constitutionally valid in the light of Article 14 of the Constitution (Right to Equality). This burden is further aggravated as the IWs cannot withdraw their contributions before 58 years of age (or in certain other specified conditions), even if they work in India only for a limited period and not till retirement. 

According to the Union of India (one of the respondents), the specific provision for IWs introduced in 2008, were to honor the bilateral agreements with foreign countries and to fulfill international obligations. As IW are a special class, special provisions were introduced for them in 2008. 
Regarding the withdrawal of PF contributions, an IW from a country with which India has a Social Security Arrangement (SSA), is entitled to withdraw the PF contributions upon ending his Indian employment. 

The counsel also argued that such specific provisions for IW are neither discriminative nor violative of Article 14 of the Constitution, as the Government has the power to determine laws and class of people for the legislation. Further, such classification is not arbitrary and has a link between the differentia which is the basis of classification and the object of the PF Act.

After careful consideration of arguments from both the parties, the HC drew attention towards the distinction between “discrimination without reason” and “discrimination with reason”. It also held that the while Article 14 prohibits class legislation, it does not prohibit reasonable classification for the purposes of legislation, provided such classification has an intelligible differentia and such differentia is linked to the object sought to be achieved by the statute in question.

In the eyes of HC, the Union of India failed to establish any connection between the differentiation of class and objective of the PF Act, especially when the PF Act was enacted with a view to give retirement benefits to those in lower salary brackets. Moreover, the withdrawal benefit upon ceasing to be an Indian employment is not available in the Para 83 for IW from non SSA country to India. It also held that non-citizen employees and citizen employees working in India are equal and if treated differently violates Article 14, thus allowed the writ petition.

It is highly probable that the Union of India will challenge the above ruling in Supreme Court and meanwhile, may try to obtain a stay on the above decision. 

Nonetheless, the ruling has given many points to ponder to the employers and IWs working in India. 

It is a well-known fact that the PF and pension contributions for IWs are (more often than not) considerable in absolute amounts, while determining the Cost-to-Company. In the backdrop of the ruling, should the employers and employees continue to contribute on gross pay or can they cap their salary to INR 15,000 per month? Are they even mandated to contribute towards social security in India at all? Since the specific provision for IW is almost 16 years old, this matter may raise doubts in the minds of those IWs who have already left India and have already contributed on their gross pay in the past. 

More than the above, enforcing the ruling will be even more challenging, as it will unleash several other issues, such as, income tax on PF contributions (in excess of certain specified limits) already paid by expats, maximum deduction claimed by these expats under Section 80C and deduction claimed by employers in their corporate tax return. 

All said and done, only time will tell how the matter evolves and the impact it has on the current state of affairs. This is the space employers and IWs will need to keep a watch. 

Tanu Gupta is a Partner at Mainstay Tax Advisors LLP

(views expressed are personal)