In case of permanent or non-contractual employees, lower basic salary means lower dearness allowance, lower provident fund and pension contributions and higher risk of drawing income-tax department’s attention on the portion of income which your employer gives you in cash reimbursements on production of fictitious bills. Contractual employees are not generally entitled to DA. But, like those permanent employees, they too stand to lose on PF and pension due to lower basic salary and could be exposed to income-tax scrutiny on cash elements of your income, which often surpass the taxable income.

The practice, a notorious HR invention for the benefit of management, has plagued almost the entire corporate sector including multi-national corporations as one of the fall-outs of the country’s economic reform. Although it temporarily benefits employees, they come out losers at the end of the service period by way of separation benefits from employers. The government too is a loser in terms of tax collection from employees on their understated taxable income. Only beneficiary of the so-called HR-engineered ‘employee-friendly’ salary break-up are the employers, who save huge amounts on their matching contributions to employees’ welfare funds such as PF and pension.

Under threat from the government, whose only interest lies in higher income tax collection from employees, employers have cleverly set trade unions fight the battle for employees against the official move to stop the tax-saving salary break-up practices. Unfortunately, confused trade unions are doing exactly that, playing in the hands of canny employers, to protect immediate take-home income of employees. In the process, employees are trapped between their less scrupulous employers trying to save on expenditure on employees’ separation benefits and the income-tax sharks making the fixed income group and the organised sector their easy prey. Ironically, there is little government pressure on dishonest taxmen who let go lightly tens of millions of high-earning self-employed shops and business establishment owners and professionals such as doctors, chartered accountants, lawyers, architects, transport operators, builders, charitable trust operators and agents and consultants of all sorts, forming together the country’s biggest group of tax evaders and black-money generators.

The recent order of Delhi’s regional PF commissioner held the Indian unit of G4S Plc, the world’s largest private security services company, guilty of not paying up PF dues of the order of Rs. 133 crore in respect of over 10,000 employees and instructed the company to clear them fast. The RPF order on the security services firm relates to a period between 2003 and 2011. Nation-wide, the alleged PF evasion by G4S, which has 1.6 lakh employees on its payroll in India, may add up to Rs. 1,900 crore. Two years ago, the Employees’ Provident Fund Organisation (EPFO) had asked all regional PF offices in the country to investigate G4S and other private security firms for PF payment defaults. G4S has been accused of splitting its employees’ salary into two equal components – basic and allowances – and remitted PF only on basic salary.

Of late, the union finance ministry too has got into the act to make sure the employer-employee friendly salary break-up does not become an easy tool to evade income-tax. Taxmen are increasingly after organised sector employers and their high earning executives receiving a good portion of their emoluments in cash reimbursements and in ‘business promotion’ expenses. The huge size of the PF and pension funds has opened an additional opportunity for the finance ministry to invite FIIs or foreign fund managers to manage part of these funds to earn better return for the contributors and also to perk up the stock market, in the process.

Meanwhile, the World Bank, which undertook a study of the issue concerning PF and pension funds in India at the behest of the finance ministry, has urged India to make provident fund membership compulsory for all formal sector staff and urgently raise the wage ceiling of Rs. 6,500 for mandatory PF contributions. Such a ceiling makes no sense under the present situation as it is even lower than the minimum wages in most states. The government had sought a special study with the World Bank's help to assess the position of the Employees' Pension Scheme (EPS). Introduced in 1995, the Rs 1,40,000-crore EPS was estimated to have run up a Rs 54,000 crore deficit by 2009, leading to the finance ministry's intervention.

The Bank has also reportedly advised to reduce the threshold for bringing firms under the Employees' Provident Fund (EPF) net from 20 staff to 10, dismissing finance ministry fears that bringing more workers into the retirement fund could aggravate the deficit in a pension scheme offered with EPF and create contingent liabilities for the exchequer. The study report said there was no deficit in the EPS and it could be sustained till 2075 with a Rs 500 hike in the EPF wage ceiling every five years. The Bank's top social security experts validated the study and said the 'base deficit' estimate of around Rs 12,000 crore in the EPS roughly matches the Bank's calculations. But this deficit was 'insignificant' in view of the scheme's size and adding more workers to the EPF net would make the pension scheme more robust, the Bank's experts told Indian officials. '...If assumptions are even slightly modified, the (Rs 12,000 crore) shortfall turns into a surplus. Reducing the threshold limit from 20 to 10, assuming the age profile remains the same, will have no significant negative effect,' the Bank has reportedly said.

The Bank has also asked India to urgently raise the wage ceiling and the pensions paid out under the EPS so that workers don't retire in penury. 'Even though the scheme appears to be sustainable as on date based on existing rules, there is an urgent need to index the wage ceiling and pension, if a meaningful replacement old age income is to be ensured,' it said. As the only formal social security system for Indian workers, the Employees' Provident Fund (EPF) covers just about 10 per cent of the 400 million-plus workforce. The monthly wage ceiling for statutory EPF coverage hasn't been revised since 2001 while the 20-staff threshold was set in 1952, when Parliament ratified the EPF Act. (IPA Service)