Sunday, 5 February 2012

Business Line : Features / Mentor : Providing social security for Indians

Business Line : Features / Mentor : Providing social security for Indians

Though PF contributions are internal to an Indian supplier, many foreign customers treat internal statutory compliance as part of a vendor's assessment.
Kanu Patel is an employee of a garment exporter in India which caters to the requirement of European customers. One of the European customers is a Belgian company which is particular that their supplier in India meets all requisite statutory compliances. As part of the requirement, the supplier must also regularly comply with the Provident Fund provisions via deductions on employee pay cheque and employer contributions as well.
Kanu decided to check his PF balance online after receiving information from friends and colleagues that this facility was now available online. Unfortunately, Kanu found that the balance information he received didn't come close to his estimation of the balance in the fund. As he worked very closely with counterparts in the Belgian client's company, he shared the information with them.


Though PF contributions are the internal activity of the Indian supplier company, many European and American customers treat internal statutory compliance as part of the vendor's assessment.
A blacklist on any item, therefore, means that the vendor becomes ineligible for the contract. While dealing with international vendors, this is perhaps one method adopted by clients from almost all developed nations to make sure that they don't unknowingly become a party to unhealthy business practices.
As a result, when Kanu shared the information regarding his PF account balance, the Belgian customer requested a reassessment of the garment exporter on statutory compliances, especially PF. The company also wanted to know how PF is calculated and verified in India.
To go into the background of Provident Fund, it is basically a social security provision and provides some financial stability post retirement to employees. It isn't an idea specific to India, and may generally be found across the globe. The United States imposes Social Security and Medicare contributions towards old age, disability, pension and medical benefits. As early as the 1880s, Germany had built a social insurance programme (one requiring contributions from workers) that provided for sickness, maternity, and old-age benefits. Volatility of income especially hurt the older workers, as they often bore the brunt of economic downturns.
The constitution of India provides that the state, within the limits of its economic capacity, must make effective provision for securing the right to work, education and to public assistance in cases of unemployment, old age, sickness and disablement.
It is these directive principles which led to the creation of the Provident Fund Act. The contribution limits are 12 per cent of basic salary plus dearness allowance, subject to a maximum limit of Rs 6,500 (Rs 780).
This is true for both employers and employees, though employees may contribute a higher amount voluntarily.


A while ago, as most government departments started to computerise and extensively become available online, the PF department too started a similar drive. Currently, the department has a system of messaging an individual's balance to his mobile number upon request. The balance referred to here is inclusive of both employer and employee contribution. However, the system has various lacunae. A single amount is messaged, with no break-up, and the employee is unable to figure out the exact details; the message gives an “account updated till” date that doesn't clarify to the employees if a record update is pending from the department or from the employer. To add to all this is the fact that 8.33 per cent contributed by the employer to the family pension fund doesn't form part of the balance messaged to employee. These facts should answer Kanu's poser, but all of these put together force many an employee to arrive at an erroneous conclusion.In this specific case, the issue is multi-dimensional. The Belgian customer is able to do a comparative analysis of some other provident fund pension schemes amongst various countries where he has suppliers, and the PF details of these suppliers are available online.
In this case, the Indian employer is compliant, and his responsibility is complete upon remittance of both employee and employer contributions on time. However, as these details aren't available online, neither Kanu nor the Belgian company are able to independently verify the facts. To Kanu, it is a matter of future funding and savings, while to the client, it is a matter of assessment of his Indian vendor — from both points of view, the issue assumes significance for the garment exporter. Unlike income tax, where any deduction becomes crystal clear when one files one's taxes, PF remains elusive unless the employee takes the efforts to visit the PF office and verify his account balance. The idea of making the account balances transparent to the employer and employee is commendable, but its execution leaves much to be desired. Such is the state of the online updates provided by the PF department.