Direct Tax Alert

Karnataka High Court Judgement: Provisions Applicable to International Worker under EPF & EPS Schemes are Unconstitutional and Arbitrary

May 16, 2024

In a recent judgement the Karnataka High Court (HC) has decided that the provisions introduced in 2008, under para 83 of Employee Provident Fund Scheme (EPF), and under 43A of the Employees Pension Scheme (EPS) in regard to cross border workers/International Worker (IW), are unconstitutional and arbitrary, since these provisions are discriminatory in nature and violate Article 14 of the Constitution of India.

The main arguments presented before the HC by the petitioner were as follows:

  • The very intention of the EPF Act 1952 was to ensure that the weaker section with lower salary limits get the retirement benefits, however, the said provisions introduced in 2008 covers the IWs/Cross border employees who earn high monthly salary packages. This contradicts with the very premise of the EPF Act.
  • The domestic workers who draw monthly salary exceeding INR 15000 (ceiling limit) can opt out from the EPF Scheme, whereas a Cross border employee/IWs do not have such option and have to be covered under the scheme irrespective of the salary drawn.
  • Under the provisions of the para 83 and 43A respectively, the IWs are required to contribute on their gross salary (including the salary received from the home country of the IWs), whereas the Indian counterparts who are having monthly salary of more than INR 15000, can opt to contribute on the salary ceiling of INR 15000 itself.
  • The Cross border employees/IWs who enter into India with a Certificate of Coverage (CoC), (where India has entered into a Social Security Agreement, SSA), are not required to contribute under the EPF. Whereas the Cross border employees/IWs who come from Non-SSA countries has to mandatorily contribute under EPF.
  • In addition to above the IWs from a SSA countries are allowed to withdraw their accumulated PF balances upon their retirement from the covered Indian establishment. However, IWs from the Non-SSA countries are allowed to withdraws their accumulated PF balances only after attaining the age limit of 58 years or on retirement from the covered Indian establishment, whichever is later.

The Union of India argued that the provisions introduced in 2008 for the IWs are not discriminatory, since the Government has the power to determine laws and class of people for the legislation. The counsel also argued that to comply with the international obligations and to make the rules for the IWs more conducive to work, the Government has made the special provisions for IWs. The separate classification of IWs did have a rationale considering the special status of the IWs.

After considering the arguments from the both sides, the HC struck down the special provisions introduced in 2008 for the IWs and decided that the non-citizen employees working in India and employees who are Indian citizen are equal. However, introduction of special provisions has resulted into separate classes which discriminates between IWs and domestic workers in following ways:

  • There is no salary limit for a Cross border employees/IWs when it comes to contribution to PF account which is in contrast to the domestic employees. Thus, resulting in higher burden on employers of the Cross border employees/IWs.
  • The intention of the PF Act is to ensure that weaker section having lower salary limits are to be covered mandatorily and was not intended to include employees earning high salary packages.
  • The special provisions for the IWs were introduced in the EPF and EPS schemes, however, no corresponding amendments were made in the EPF Act itself. This makes the said provisions inoperative and ultra vires.

It is expected that this decision of the HC might be challenged before the larger bench of the HC or in the Supreme Court of India as the special provisions were introduced in 2008 and since then other related rules and regulations has been introduced in the form of taxation of PF, withdrawal of PF balances, and various Social Security Agreements (SSAs) has been signed. To take any decision on the basis of the HC judgement would be a haste. One should keep a close watch on further developments until the matter reaches its finality. Until then the organisations may continue status quo towards the EPF compliance in case of IWs.

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