PF deduction for international employee paid as consulting fees

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1

Hi,

We have an Intenational employee from UK who will be paid as consulting fees against the invoice by deducting 10% TDS, do we need to deduct PF for him. also, advice can we do 10% tds is correct or need to deduct full tax

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Hi Raghavendra,

In the context of the Employees’ Provident Funds (EPF) Act of India, International Worker and International Employee are often used interchangeably. However, there can be subtle distinctions based on the scope of applicability and general use:

1. International Worker (IW)

  • Legal Definition: Under the EPF Act, an “International Worker” is a specific term defined in EPFO regulations to denote employees (both Indian and foreign nationals) who meet certain criteria for contributing to the Indian EPF.
  • Eligibility: This typically includes foreign nationals working in India for an establishment covered under the EPF Act and Indian nationals working in countries with which India has a Social Security Agreement (SSA).
  • Mandatory Contributions: International Workers are required to contribute to the EPF on their entire salary without any wage ceiling, unlike domestic workers.
  • Social Security Agreements (SSAs): The term “International Worker” is linked to compliance under SSAs between India and other countries, allowing for specific benefits like exemption from dual contributions.

Note: Considering the above, the employer have to determine whether the individual is engaged as a consultant, or coming within the ambit of international worker to proceed with PF contribution.

2. International Employee

  • Broader Use: “International Employee” is a more general term that may refer to any employee working internationally, regardless of their association with the EPF or SSA. This term can encompass all employees working across international borders.
  • Not Legally Defined: It is not a specific term under EPF or SSA regulations, so it does not imply mandatory PF contributions.
  • Global Assignments: An International Employee might include any employee on a global assignment without necessarily being subject to PF obligations.

In summary:

  • International Worker is a defined, legal term under EPFO and SSA requirements with mandatory contributions.
  • International Employee is a general term referring to any employee working abroad and does not have specific regulatory implications under Indian EPF law.

Under the Employees’ Provident Funds (EPF) Act of India, an International Worker (IW) is defined as:

  1. Indian Employees: Individuals holding Indian passports who have worked or are going to work in a foreign country with which India has a Social Security Agreement (SSA) and are eligible to avail benefits under the social security program of that country.
  2. Foreign Nationals: Employees holding non-Indian passports working for an establishment in India to which the EPF Act applies.

Key Points Regarding International Workers:

  • Mandatory EPF Membership: All International Workers, except those classified as ‘excluded employees’, are required to become members of the EPF from the date of joining an EPF-covered establishment.
  • Excluded Employees: This category includes:
    • Nationals from SSA countries who have obtained a Certificate of Coverage (COC) from their home country.
    • Singapore nationals contributing to their home country’s social security system, as per the India-Singapore Comprehensive Economic Cooperation Agreement (CECA) 2005.
  • Contribution Requirements: International Workers must contribute to the EPF on their full salary, without any wage ceiling.
  • Social Security Agreements (SSAs): India has entered into SSAs with several countries to protect the social security rights of workers moving between these nations. These agreements typically cover provisions like detachment (exemption from contributing to the host country’s social security), totalization (combining periods of service in both countries for eligibility), portability of benefits, and equality of treatment.
  • Certificate of Coverage (COC): Indian employees posted to SSA countries can obtain a COC from the EPFO, which exempts them from contributing to the host country’s social security system during their assignment. This certificate is essential to avoid dual contributions.

For detailed information and updates, refer to the EPFO’s official guidelines on International Workers.

I found these 2 handbooks in EPFO website that may be of interest to you.

In recent developments concerning Provident Fund (PF) contributions for International Workers in India:

Karnataka High Court Ruling (April 2024) delivered a landmark judgment declaring certain provisions related to International Workers under the Employees’ Provident Funds Scheme, 1952, and the Employees’ Pension Scheme, 1995, as unconstitutional and arbitrary.

Key Points of the Judgment:

  • Violation of Article 14: The court found that requiring International Workers to contribute to the PF without any wage ceiling, while domestic workers earning above ₹15,000 per month are exempt, violates the principle of equality before the law enshrined in Article 14 of the Indian Constitution.
  • Disparity in Contributions: The judgment highlighted the inconsistency where Indian employees working abroad in countries with Social Security Agreements (SSAs) with India continue to contribute to the PF on a capped salary of ₹15,000, whereas foreign workers in India are mandated to contribute on their entire salary.

Implications:

This ruling has significant implications for both employers and International Workers:

  • Financial Impact: Employers may need to reassess their PF contribution strategies for International Workers, potentially reducing the financial burden associated with uncapped contributions.
  • Compliance Considerations: Organizations should stay informed about any appeals or further legal developments to ensure compliance with the prevailing legal framework.

EPFO’s Response has indicated its intention to challenge this ruling. A senior government official stated that the EPFO is actively evaluating the course of action in response to the judgment.

The Karnataka High Court’s decision marks a pivotal moment in the regulation of PF contributions for International Workers in India. Both employers and employees should monitor ongoing legal proceedings and be prepared to adapt to any changes in compliance requirements.

Regards,
Bhuvana Anand

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4

Hi Madam, @Bhuvana_Anand
Philippines do not have SSA with India and do we require to contribute EPF those Filipinos who are working in India for 2 - 5 years?

Your reply in this matter is highly appreciated.

Thank you.
Regards,
Sowjanya

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@SOWJANYA1

I am happy to know that you have Filipino employees in your company :blush: As I am a Filipino myself …

And your topic interest me much!

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Hi Sowjanya,

Please refer to page 5, 6, 7 in this EPFO SSA guideline.

This may be of help.

Regards,
Bhuvana Anand

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Thank you madam,
I will go through it.

Regards,
Sowjanya

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PF (Provident Fund) deduction is not applicable for international employees if they are paid as consultants and not as salaried employees. PF applies only to employees under an employer-employee relationship, not independent contractors or consultants.

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