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Private Provident Fund Trusts

An establishment covered under the EPF & MP Act, 1952 is required to comply with the statutory provisions of the Act and also the provisions of the schemes framed under the Act namely EPF scheme, 1952, EPS scheme, 1995 and EDLI scheme, 1976. There are about 48 lakh subscribers with a total subscription of more than 1 lakh crore in the Private PF Trusts. This article deals with the issue relating to tax benefit on PF contributions, which affects more than 2000 Companies, who run their own PF Trusts. The article specifically focuses on getting exemption from the operation of the EPF Scheme. Read on
In the year 1952, as part of the Social Security measures, the Indian Government introduced a mandatory savings scheme for non-government employees known as Employees Provident Fund Scheme through the Employees Provident Fund & Miscellaneous Provisions Act, 1952. This Act requires employers to provide PF benefits to their employees by way of making PF contributions and deductions from their employees and remit the same to the PF Authorities. The Government has also permitted employers to establish and manage their own private PF schemes, subject to certain conditions prescribed under the EPF & MP Act. Two of the most important conditions; (a) The benefits extended by such trusts should not be less favourable than the benefits provided under the Act and Scheme. More particularly the rate of interest shall not be less favourable. (b) Another condition was that such private PF trust were required to seek approval under the Income-tax Act, 1961 (I-T Act) for employees to get tax benefits. However, there was no need for a Private PF Trust to get exemption from the Employees Provident Fund Organisation. There are about 48 lakh subscribers with a total subscription of more than 1 lakh crore in the Private PF Trusts. The Private PF Trusts seemed to be more attractive to the employees, as the contributions remained with the Trust. They got the loans/ settlements quickly. Moreover, they also enjoyed the tax exemptions for their contributions as well as employers contributions. Amendment in the Income Tax Act Consequent to an amendment in the Finance Act, 2006, it was made mandatory that all employers must obtain the exemption in respect of their private trusts from PF authorities as well, and also get

*A. B. Srinivasan

**CA. R. Hariharasubramanian

*The author is General Manager, HR of India Cements Ltd. Chennai. **The author is Vice President (Finance & Taxation), India Cements Ltd. Chennai.

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fresh exemption under the Incometax Act, 1961 in order to avail the tax benefit. Prior to 2006, obtaining exemption for private Trusts under Section 17 of the PF Act was not a pre-condition to obtain Income Tax recognition. Initially, the deadline for getting exemption was fixed as 31st March, 2007. However, it was periodically extended and the current extension is valid till 31st March, 2012. The reason for the extension of time was primarily due to the quantum of applications in the pipeline with the PF authorities, which require speedy clearance. Exemption from the Provisions of Act/Schemes An establishment covered under the EPF & MP Act, 1952 is required to comply with the statutory provisions of the Act and also the provisions of the schemes framed under the Act namely EPF scheme, 1952, EPS scheme, 1995 and EDLI scheme, 1976. However, the Act provides for grant of exemption from the; n Operation of Act, and n Operation of the schemes framed under the Act Thus, the types of exemption provided under the Act may be broadly classified as under: (a) Exemption from the Act (including the schemes), under Section 16 (2) of the Act. (b) Exemption from the operation of the scheme/s viz. EPF scheme/ EPS scheme/EDLI scheme. Since the issue pertains to getting exemption from the operation of the EPF scheme, we will focus on it. (b) Exemption from the operation of the EPF Scheme:

The exemption from the operation of the scheme is granted. 1. To an establishment as a whole: 2. To an individual employee: 3. To a class of employees. 1. Exemption to an establishment as a whole: Exemption will be granted to an establishment under Section 17 (1) (a) of the Act by the Appropriate Government (Central/State Government). The Establishment has to make an application in the prescribed form the Government through their jurisdictional Regional Provident Fund Commissioner, to exempt it from the operation of the statutory scheme and give permission to operate its own scheme. If the Government is satisfied that the benefits provided by the Private Trust is not less favourable than the benefits provided under the Scheme, then it may permit the establishment to run its own Trust. 2. Exemption of an individual employee: Exemption will be granted to an employee under Section 17 (2) read with Para27 of the E.P F. Scheme. It is granted by . the Regional Provident Fund Commissioner on receipt of application in Form 1 from the employee. 3. Exemption of a class of Employees: Exemption will be granted to a class of employees under Section 17 (2) read with Para 27A of the EPF Scheme. It is granted by the appropriate Government on receipt of application from the employer. As mentioned earlier, the general condition for grant of exemption

onsequent to an amendment in the Finance Act, 2006, it was made mandatory that all employers must obtain the exemption in respect of their private Trusts from PF authorities as well, and also get fresh exemption under the Income-tax Act, 1961 in order to avail the tax benefit. Initially, the deadline for getting exemption was fixed as 31st March 2007. However, it was periodically extended and the current extension is valid till 31st March 2012.
is that the benefits extended by such Trusts should not be less favourable than the benefits provided under the Act and Scheme. More particularly, the rate of interest shall not be less favourable. Implications on Not Getting Exemption from the PF Authorities & IT Department n Companys contribution to the PF will not be allowed as an expenditure for the Company. n Employees contribution is not eligible for benefits under Section 80C of the I.T Act. n Companys statutory contribution to the PF will be treated as perquisite and becomes taxable in the hands of the employees. n The Income earned by the fund will be taxable. n Interest earned by the employees on the contributions is also taxable. Possible Solutions: Companies can: (i) surrender their PF Trusts to the EPF Authorities, (ii) get exemption from the EPF Authorities,

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(iii) seek tax deferment citing the delay in getting approval, and (iv) seek for judicial intervention Out of the above four options, the first two are more feasible options. (i) Surrendering the PF Trust n The Companies have to transfer all their Trust members Accounts to the EPFO. n They need to transfer all the investments holdings like; securities/bonds, Special Deposits, bank account, etc. in favour of EPFO. n Remittance of PF/Pension contributions to the PF Authorities for future. (ii) Get Exemption n Initially Trust members Accounts have to be transferred to the EPFO and the Companies have to apply for Exemption. n The Companies have to fulfill other requirements for getting exemption, as prescribed in the EPF Act like; forming a new Trust, drafting

Trust Rules in accordance with the PF Rules, appointment of Trustees, etc. n If satisfied/considered by PF authorities, exemption will be granted to the Establishment for maintaining a PF Trust. n After getting exemption, the Establishment can retransfer all the members accounts. n The PF Authorities will transfer the securities/bonds, etc. which were transferred to their account. After getting the exemption, this Trust also has to be approved by the Income Tax Authorities. Challenges The process of getting approval from the PF Authorities and from the Income Tax Department is a time consuming process and it may take about two years. In addition to this, the following are notable challenges. (a) Getting exemption from PF Authorities is a time consuming process and requires voluminous work. (b) Trust has to pay the interest to its members at least on par with the EPFO. (c) Now-a-days, return on investments is very low and in case of any deficit, the Company has to meet the same. (d) Moreover, the deadline fixed by the Finance Ministry is 31st March, 2012. Best Possible Option Keeping in mind the above difficulties, surrendering the PF Trust to the EPF Organisation is the best option. The following are important points to be noted, while implementing the same. 1. We have to make a formal request for surrendering the Trust to the PF Authorities.

2. After scrutinising our request and also after having meetings with the concerned Trust Officials, PF Authorities will accept our request and advise the concerned Trust to transfer the past accumulations as per the guidelines stipulated under Para 28 of the EPF Scheme read with Section 15 (2) of the Act. a. The membership will commence from the date of transfer of Trust to the EPFO and we need to submit Form-5 in this regard. b. The past accumulations of the members of the Trust as reflected in the Past Accumulations statement to be transferred fully by cash. c. The past accumulations of the members have to be remitted by way of cash within 10 days from the date of their approval letter. 3. Accordingly, we have to sell the investments (securities/bonds) in the open market. 4. If the Trust has invested in Special Deposit Scheme maintained with a nationalised bank, they have to close the account and transfer the money. RBI has issued a specific circular for such closure of SDS account and transfer the money to the EPFO. 5. In case of any deficit in the Provident Fund Trust account, it has to be met by the Company only. 6. After taking the above actions, we can remit the past accumulations of our members within the stipulated time. 7. It is also the duty of the Trust/ Company to pay to the EPFO the interest that may be notified by the PF Authorities on the accumulations from the first day of the financial year till the date of transfer. n

he process of getting approval from the PF Authorities and from the Income Tax Department is a time consuming process and it may take about two years. In addition to this, the following are notable challenges. Trust has to pay the interest to its members at least on par with the EPFO. Now-a-days, return on investments is very low and in case of any deficit, the Company has to meet the same. Keeping in mind the difficulties, surrendering the PF Trust to the EPF Organisation is the best option.
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