'Allowances', paid by employer to its employees, will be included in the scope of 'basic wages' and hence subject to Provident Fund contributions.
A Bench of Hon'ble Justices Arun Mishra and Navin Sinha of the Hon'ble Supreme Court vide judgement dated 28th February, 2019 in the case of The Regional Provident Fund Commissioner (II) West Bengal Vs Vivekananda Vidyamandir & Ors. has reiterated the principle that the crucial test to be applied for inclusion of allowances as part of "Basic Wages" is that of universality i.e. all allowances which are universally, uniformly, necessarily and ordinarily paid to all employees would form part of "Basic Wages" for the purpose of computing provident fund contributions under the Employees' Provident Fund and Miscellaneous Provision Act, 1952 (Act)
Supreme Court ruling expanding the scope of 'basic wages' for calculation of employee provident fund contributions is likely to result in gains for those employees whose basic salary was below Rs.15,000 or Rs.6,500 (as applicable in earlier years) because their employers may have to make good the short contribution in those years. Whereas the ruling will have retrospective impact, presently there's lack of clarity on the precise date back that it'll apply.
The Supreme Court has processed that solely allowances of the subsequent nature can be excluded from 'basic wages' for calculation of Provident Fund contributions:
a) Allowances which are not paid across the board to all employees in a particular category; or
b) Allowances which are variable in nature; or
c) Allowances which are linked to any incentive for production resulting in greater output by an employee; or
d) Allowance which are paid especially to those who avail the opportunity.
What categories of employees does it impact?
For employees with basic salary exceeding Rs.15,000 per month - there could be no impact of this ruling as for such employees, Provident Fund contributions are already made on monthly pay exceeding the ceiling limit as prescribed under the law.
Will the above impact be retrospective or prospective?
Three points to consider:
1. The Supreme Court ruling is an interpretation of existing law
2. The Supreme Court has reiterated the principles laid down earlier in its 1962 ruling within the case of Bridge & Roof
3. There is no statute of limitation within Provident Fund
Given the above, yes - the ruling may have retrospective impact. The major impact will be for the period after 1 September 2014 for employees with basic salary less than Rs.15,000. Where companies have employees prior to 1st September, 2014 with basic salary less than Rs.6,500 - there could be impact for them as well.
If retrospective, who will bear the cost for past compliance and problems related to the same?
For the past, employer may need to bear the cost of past compliance. Provident Fund rules do not allow employer to recover past contributions from the current salary of the employees. On the question how far the authorities can go back, the law is silent. The PF office has issued a circular No. 7(l)2012/RCs Review Meeting/345, earlier on 30th November, 2012 stating under para 10 that 7A enquiry period cannot go beyond preceding 7 financial years. However, this circular was kept in abeyance vide another circular No. 7(1)2012/RCs Review Meeting/21224, dated 18th December, 2012.