Article (November-2019)


Govt. must grant amnesty from retrospective implementation of SC PF judgment

H.L. Kumar

Designation : -   Advocate, Supreme Court

Organization : -  New Delhi


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Employees' Provident Fund Organisation is one such organization which has a huge corpus of nearly sixty thousand crores, lying dormant with it because it has no records of the beneficiaries and yet it has been asking for the records and deposit of the PF amounts from the establishments, particularly of the MSME sectors, on such allowances as were left out by them for deductions. Obviously, the field functionaries of the department derive perverse pleasure in harassing those, who manage the establishments. It must stop forthwith. The Government should immediately step in to salvage the industries from their predicament, which has further increased especially after the disposal of the review petition of Vivekanand Vidyamandir case by the Supreme Court of India. This case is brazenly being used as yet another ammunition in the armory of the Provident Fund Authorities. This reinforces the need to provide amnesty to establishments by the Government for the larger benefit of the society and the industries.

When thousands of crores are doled out to farmers to save the agriculture and lakhs of crores are spent in subsidies to millions of poor families to help them to come out from the thralldom of poverty, it will certainly be a positive step to provide general amnesty to industries to save them from going into the mire of difficulties. When lakhs of crores of rupees are declared as Non-Performing Assets (NPA), then it is very genuine and reasonable on the part of the government to help all entrepreneurs from paying the arrears of the EPF as it has become due to them in the wake of the judgment of the Supreme Court.

In this context, it is necessary to know the background of this demand. The Supreme Court handed down a verdict at the beginning of the year in 'Reginal Provident Fund Commissioner (II) West Bengal versus Vivekanand Vidyamandir and others, (2019, LLR, 339)' in which it was held that the establishments will have to pay the Provident Fund contributions for certain allowances.  There was a lot of confusion because of the Supreme Court had not said unequivocally that the PF contributions would have to be made prospectively or retrospectively. Therefore, a Review Petition was filed in the court, which has now been dismissed.

Those having abreast of the Supreme Court procedures know it well that Review Petitions are accepted only in rare cases. Being in the legal profession for more than half-century I have been conscious of the fact that two Judges of the Supreme Court would abide by the judgment of the Six Judge Bench in Bridge and Roof vs. Union of India, 1992 (5) FLR 423, wherein it was held all allowances, which were being paid ordinarily, necessarily and universally would be treated as wages for provident fund contributions. All along during the pendency of the appeals before the Supreme Court challenging the main judgment of Madhya Pradesh High Court in Surya Roshni Limited, we in the Labour Law Reporter have been warning the subscribers with regard to the outcome of the judgment. Since the judicial discipline requires for pronouncing a judgment by a lesser number of judges will have to be followed the decision of the larger bench. The other alternative for the smaller bench is to refer the matter to the Chief Justice to constitute a still larger bench to settle the important points of law and facts involved in the case. This advice of mine was ignored by most of them as it happens when it is given free of cost. The result is that despite the best efforts and engaging top advocates, outcome was not in line of relief as sought for.

In Vivekanand and Vidyamandir case, the principle of Bridge & Roof (1962) but with regard to the allowances was followed. However, it has left some gaping holes.  Hence, the test adopted to determine if any payment was to be excluded from basic wage is that the payment under the scheme must have direct access and linkage to the payment of such special allowance as not being common to all. The crucial test is one of the accepted principles is that where the wage is universally, necessarily and ordinarily paid to all across the board such emoluments are basic wages. On the other side, it has been consistently followed by the employers and the employees as well as the Provident Fund Department, through the various circulars/guidelines issued not only by the Central Provident Fund Commissioner but also the Govt. of India in exercise of the statutory powers under the Act, to issue directions for removing difficulties, wherein inter alia, compensatory allowance; special allowance; personal allowance - pay over and above the "basic wages" and DA for skill, efficiency or past good records; subsidy paid to workers in lieu of canteen facilities along with washing allowance had been specifically mentioned as excluded payments not amounting to "basic wages" and dearness allowance.

Avoid Reckless Introduction of New Allowances

We at the Labour Law Reporter not only wrote the articles to the subscribers but also held seminars. The employers have been recklessly and ignorantly introducing various allowances like;  City Compensatory Allowance (even when an employee is posted in a small town), Special Allowance (irrespective of any specialization), Tiffin Allowance, Night Shift Allowance, Hardship Allowance, Supplementary Allowance, Punctuality Allowance, Attendance Allowance, Children Education Allowance, Travelling Allowance, Uniform Allowance, Washing Allowance, Tea Allowance, Canteen Allowance, Leave Travel Allowance, Milk Allowance, Make Up Allowance, Newspaper Allowance, Regularity Allowance, Suspension Allowance, Medical Allowance, Production Allowance, Heat Gas and Dust Allowance, Meal/Food Allowance, Overtime Allowance, Wellness Allowance, Performance Allowance, Field Working Allowance, Re-Location Allowance, Cash Handling Allowance, Supervisory Allowance, Steno Typist Allowance, Computer Allowance, Conveyance Allowance, Area Allowance, Driver Allowance, Motor Cycle Allowance, Cycle Allowance, Late Sitting Allowance, Mobile Allowance, Entertainment Allowance, Non-practising Allowance, Non-teaching Allowance, Additional Allowance, Management Allowance, Club Allowance, etc.

There is no doubt that this judgment has come as a windfall for those employees, whose salary was less than Rs. 15,000/- because now their employers will have to make good the short contributions for those years if it is made applicable with retrospective effect without making payment for equal contribution since the Employees Provident Fund Scheme casts the obligation on the employer as per its paragraph 32. The ruling has certainly clarified that the allowances (a) which are variable in nature, (b) linked to an incentive for production resulting in greater output by an employee, or (c) which are not paid across the board to all employees in a particular category will form the part of the salary for PF purposes. Till now the employers have been calculating provident fund contribution on the basic salary only.

Another matter which is a cause for concern is that if the Provident Fund Contributions are payable for the past, then the employers will have to deposit it using the employees' Universal Account Number and EPF Account Number. But then who will bear the cost for past compliance and who will handle the problems related to the same? These are again the points, for which the clarifications should be issued only by the Ministry.

There are field officers i.e. Enforcement Officers, who often go beyond their briefs and ask for the original records of even 25 years, which is absolutely difficult/impossible to maintain even for the well-oiled organizations. Such officers believe more in arms twisting of the establishments than in doing their jobs with all sincerity. Although, a circular vide no. C-111/ Compliance-2001/Cir/E/24045 dated 20-11-2014 was issued by Additional Central PF  Commissioner, which asked the field functionaries 'not to insist on all original records for beyond 15-20 years' because it is against the spirit of instructions issued for On-Line Registration of Establishments'.  This shows the mindset of the senior officers are hard and glove with the junior officers in the inherent perversity in harassing the employers whereas the salaries and the perks of all the officials are paid by employers by way of administrative charges over and above the contributions towards provident fund.

The litigation on the issue has travelled to various courts of law and finally to Supreme Court for more than 10 years, thus infusing uncertainty in computing the liability for the employers, who have not provided for the same in their books of accounts is not conducive for the healthy development of the industries and other establishments.   In the past, different High Courts have held different views, which added to a higher degree of uncertainty, with respect to the position of law, on the matter. The retrospective implementation will also bring forth additional financial liability to the tune of more than 37% per year (interest plus penalty under the PF Act), by way of interest and damages to the employer, for no fault on theirs. This additional liability will push up the employees' cost steeply, thus affecting the competitiveness of the industry and commercial activity.

The Employees' Provident Fund Act is common law in the country. The prospective implementation will ensure uniformity across the country without arbitrariness in claiming additional contribution from the employers and the employees. Global competitiveness provided an opportunity for the employer and employee to choose their compensation structure, based on the flexi-pay system. The thrust has been, in enhancing the take-home pay and providing windows of opportunity for the employee to choose long term investments, be it social security, insurance or asset creation etc.

Retrospective Compliance will be a setback

The retrospective compliance will give a severe setback to the momentum created in ease of doing business with the huge financial burden being imposed on the establishments and also on the MSME sector. The MSME sector contributes approximately 4% to GDP of the country. The wages and allowances that are fixed consequently to long term agreements between representative Trade unions and Management, wherein specific inclusions are identified for the purpose of contribution to Provident Fund, will be challenged leading to a plethora of litigations.

Specialized industries in the manufacturing ecosystem viz. logistics, utilities, power generation etc. contribute to the success of the primary industry and have a highly mobile workforce across the regions and industries. Retrospective implementation will make the specialized industries liable to pay the contribution, for the past period which they cannot claim from the primary industry by sheer efflux of time, and on account of their disconnect with the primary industry. Such fresh liability will lead to the closure of the specialized industries.

EPFO must eschew impractical to espouse realistic solution

The EPFO, therefore, must come with some practical and viable solution instead of accumulating money for unidentified workers. It is also relevant to state here that the rate of contribution towards employer-employee the contribution is on the much higher side and needs to be reduced by 8.33%. The ESI is also reducing both the shares of contributions i.e. employer and employees. It would reduce the burden upon the employers and employees. The low paid employees are least concerned as to what they will get at the fag and their career. This is possible since the EPFO is overflowing money at its disposal. This will also reduce the delayed payment of the deposit of contributions by the employers.

Now, when there is no scope of getting any relief from anywhere, the owners of establishments must ask the government of India to introduce a general amnesty scheme for redressal and relief for hapless employers, since the judgment will have retrospective effect, which will put a heavy burden upon the employers.

Justification for Amnesty Scheme

The justification for the introduction of the amnesty scheme is necessitated for the following amongst other :


BECAUSE, none of the employees or the trade unions representing the employees have ever raised any objection for non-deduction of provident fund contributions on their allowances since it benefited them to take home higher wages by low paid employees.

BECAUSE inspections were made periodically by the Enforcement Officers, the objections as raised were removed by the employers and these officers did not object or advise the employers to pay provident fund contributions on certain allowances other than house rent and overtime.

BECAUSE the determinations of moneys due from employers were carried on of the establishments by Regional/Assistant Provident Fund Commissioners and the employers have complied with by payment of dues as held to be payable by the employers. The proceedings under section 7A of the Act stood concluded.

BECAUSE even in the recovery of dues on allowances with the retrospective effect, it is not understood as to whom the payment will be made since a large section of employees must have either retired or expired.

BECAUSE the Provident Fund Organisation is overflowing its inoperative account (previously unclaimed account) as on 31.3.2018 Rs. 5, 46, 57, 86, 67, 858. 45 as per information received through RTI dated 23.9.2019.

 Amnesty schemes are not unknown. The government of India and Income Tax authorities frequently issue in tax and excise matter to give time-bound relief. There is nothing wrong in giving such relief to Employees' Provident Fund Organisation is not new since it has introduced such schemes on 3.01.2017 and 5.04.2018.

General amnesty to boost economy

India has not only lost its tag as the fastest growing economy but also is lagging behind its former 'poor cousin' Bangladesh, which grew by 8.1 per cent last financial year as against India's 6.8 per cent.  Similarly, while India's growth forecast for the current fiscal has been slashed to just 6.1 per cent. The small employers are struggling for survival and the ease of doing business would become only a slogan in case the liability for a past period of contribution on allowances is fastened. So, the general amnesty is the only hope and alternative to save the industry.