INDIA'S "INTERNATIONAL WORKER" PROVISION FOR PENSION FUNDS

UNCLAS SECTION 01 OF 03 MUMBAI 000186

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E.O. 12958: N/A
TAGS: ECON EFIN EINV ELAB IN
SUBJECT: INDIA'S "INTERNATIONAL WORKER" PROVISION FOR PENSION FUNDS
GENERATES CONFUSION AND WORRY

REF: A. 2008 NEW DELHI 2690

B. NEW DELHI 00000435

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1. Summary: (SBU) Social security in India is most closely
approximated by provident funds (PF),an employment-based
retirement fund, similar to a U.S. 401(K) plan. In October
2008, the Indian Ministry of Labor and Employment created a new
category of mandatory coverage for "international workers", who
were previously permitted, but not required, to participate in
the provident fund (see reftel A). Under the new provisions of
the PF program, a foreign worker employed in India is required
to become a member of the PF and contribute 12 percent of
his/her salary, which the employer simultaneously matches, to
the fund. The new ordinance exempted foreign employees from
countries with which India has an implemented social security
totalization agreement. Although India has signed these
bilateral agreements with three countries, none are currently
operational. The new rules have created a great deal of
confusion and concern among Indian and foreign companies as well
as their foreign employees, though some of the concern may be
exaggerated. While Indian workers can withdraw the total PF
contribution -- their own contribution, the employers'
contribution and accrued interest -- when they retire or resign
from a company, it is unclear whether the same withdrawal rules
apply to foreign workers once they leave India. Nonetheless,
the bureaucratic nature of the withdrawal process, especially
for government-managed PF funds, worries them. End Summary.



India's Social Security System Extended to Foreign Nationals

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2. (SBU) On 1 October 2008, the Ministry of Labor and
Employment amended the rules governing the Indian Employees
Provident Fund (PF) Scheme 2008. The new provisions require all
"international workers" of companies with more than 20 employees
registered in India, who belong to countries with whom India
does not have reciprocal social security totalization
agreements, to join the PF program. This program requires
employees to contribute twelve percent of their monthly salary
including basic wages, cost of living allowance, and the cash
value of any food concession, to the PF. The employer has to
contribute an equivalent monthly amount, minus Rs. 541 (around
USD 11) which goes to the national pension fund, to the PF.




3. (U) The PF program is a defined contribution retirement
system like a U.S. 401(k). Under Indian law, all permanent
employees of a company or organization employing over 20 workers
and earning below Rs. 6500 (around USD 130) must join the PF.
Workers earning above Rs. 6500 have the choice to opt out,
though, in practice, this is difficult. Historically, the
Employees' Provident Fund was administered by the
government-owned State Bank of India and provided a minimum
guaranteed return of eight percent. Last September, the
Employee Provident Fund Organization opened the administration
to private fund managers, including HSBC and Reliance Asset
Management Company. Private companies or institutions are also
allowed to manage their own PF (including, for example, the
Indian employees of Mission India) as long as the managers
comply with the same rules and regulations as government-run
funds, including the required minimum return. Earlier, PF rules
applied only to Indian nationals. Now, foreign nationals,
including Non-Resident Indians (NRIs),will have to contribute
to the fund. However, foreign workers from Belgium, France, and
Germany -- countries with whom India has signed reciprocal
totalization agreements -- will be exempted from joining the
provident fund once the totalization agreements are implemented
(see reftel B).



New Rules Alarm Foreign Workers

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4. (SBU) Nikhil Bhatia, Executive Director and tax consultant
with PriceWaterhouseCoopers, observed that the Indian
government's amendment to the PF rules surprised and confused
both Indian and foreign employers and employees. Bhatia said
that most foreign nationals are afraid to relinquish part of
their monthly salary as they believe that contributions to the
PF once made can never be withdrawn. He emphasized that these
fears were unfounded if the same withdrawal rules for Indian
workers also apply for foreign nationals. However, Bhatia said
that the new amendment does not specify new rules by which
foreign nationals may withdraw contributions to their PFs. He
assumes that the withdrawal rules will be the same as the
existing rules for Indian nationals. However, the Indian
Government has not formally clarified this.




5. (SBU) Under existing rules, an employee can withdraw the
total contribution to the PF fund -- their own contribution, the
employers' contribution plus accrued interest -- under a number
of different circumstances. Migrating from India for permanent
settlement or for employment abroad would, in his
interpretation, enable an employee to withdraw from the PF. If
an employee resigns and is not employed for two months after
resignation, he can withdraw the accumulated amount from the PF
system. If the employee retires or is laid-off, then he is
entitled to withdraw his accumulated amount. Bhatia said that
PF rules specify a five year vesting period; if an employee
withdraws from the system before the end of the five year
period, then the entire accumulated amount, including accrued
interest, is taxable in India.




6. (SBU) However, he admitted that dealing with the
government-run Provident Fund authorities is a tiresome and
bureaucratic exercise. He warned that expatriates should expect
delays in receiving the money back from the authorities. Sen
concurred, and called the government-run PF program an
"administrative nightmare." (Note: Employees of firms which
manage their own fund -- likely the majority of expats -- would
not need to interact with the government-run program.)
Nonetheless, Bhatia cautioned against employing companies
reducing their foreign employees' basic salary in an attempt to
minimize the employer contribution component. This is a
criminal offense under the Indian legal code, he warned.
Employers were required to file a consolidated return with
respect to expats by 15 October 2008 in addition to periodic
monthly returns. Bhatia added that delaying compliance to the
PF amendment could attract a penalty between 17 and 30 percent
of the amount owed; the first contribution was due on December
15, 2008, although he knew of many firms that had not complied
by February 2009.



Many Suspect a Political Motive in New Rules

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7. (SBU) National Association of Software and Service Companies
(NASSCOM) representative, Rajiv Vaishnav, told Econoff that the
Government of India (GOI) hopes that the new PF rules force the
U.S. to negotiate a social security totalization agreement in
order to exempt U.S. expats working in India from PF rules. Per
reftel A, a Ministry of Labor official told Econoff in October
2008 that the GOI had implemented the new rule to pressure the
U.S. to sign a totalization agreement with India. Vaishnav
stated that a GOI representative told him that only hurting U.S.
interests will highlight how important the issue is for India.
Sen dismissed this idea as he believed that the U.S. expatriate
community was small in number and, therefore, the new amendment
would hurt very few. Nonetheless, he could not explain the
rationale behind this move. He criticized the new rule as being
poorly thought out like many other rules by the government.
While advocating for a U.S.-India totalization agreement,
Vaishnav nonetheless maintained that NASSCOM had fought against
the PF changes; NASSCOM believes that the changes will make it

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more expensive for all companies, Indian and foreign, to employ
expats in India as well as possibly hurt relations with the U.S.




8. (SBU) Comment: While opinions are mixed as to why these
new rules were put into place, they will certainly make it more
expensive for companies in India to hire expat employees.
Expatriate employees actually earn more total compensation each
month under the new PF rule as employers have to match
employees' monthly PF contributions. Additionally, the minimum
return payable under the PF system is quite high as compared to
current world standards (the current minimum guaranteed return
is 8.5 percent per annum). The government has been reluctant to
pare down the return paid out from these funds, however
unprofitable or unsustainable it may be, as the PF system was
traditionally designed to provide retirement security. However,
both Indian and foreign companies based in India are already
looking at ways to minimize these additional costs. For now,
the winners appear to be accounting and consulting firms who are
explaining and advising companies on how to comply and minimize
the incremental cost of the new rule. But India is likely to be
the loser, as businesses must now add additional costs to their
calculus of bringing in foreign workers, who often bring much
needed management and process skills. End Comment.
FOLMSBEE