PF tax blow for India Inc

BUDGET IMPACT

Income tax dept will not recognise excluded funds.

Some of the leading corporate houses, banks and insurance companies may have to hand over the management of their provident funds to the Employees Provident Fund Organisation (EPFO).

This is because starting April 1, 2007, only corporates whose provident funds are recognised under the Employees' Provident Funds and Miscellaneous Provisions Act, 1952, will continue to enjoy tax breaks.

This means unless provident funds are recognised by the Regional Provident Fund Commissioner (RPFC), both employers and employees will not be able to enjoy tax exemptions on their contributions to the fund. Today, provident fund contributions are deductible from taxable income.

Section 56 of the Finance Bill 2006 has stated that all provident funds have to be recognised under Section 17 of the Provident Fund Act and if this is not the case, they will not be recognised by the income tax department from April 1, 2007.

"This will kill all excluded provident funds, which have been set up by multinational companies and software majors," said a provident fund trustee. Hindustan Lever, Tata Sons and a host of other corporates run their own excluded provident funds.

Excluded provident funds follow investment norms as laid down by the Provident Fund Act, but enjoy flexibility in framing rules on employee benefits without violating income tax rules.

This allows employers greater freedom to make investments for their employees. But, they are not recognised by the Provident Fund Act though they do enjoy tax benefits like other provident fund trusts.

There are two other forms of provident funds "" exempted and unexempted. Unexempted funds are those run by the EPFO, while exempted funds are run by employers based on the norms laid down by the RPFC.

Since 1996, the EPFO has been going slow in giving exemptions to corporate India, thereby forcing companies to park their employees' provident funds with the EPFO trust. Many corporate houses and banks have since opted for excluded provident funds "" those which are not regulated by the EPFO.

The new ruling would force them to shift their corpus to the EPFO, said another provident fund trustee. But the modalities are not clear as there are two types of exempted funds "" those governed under Section 17 of the Provident Fund Act and those governed under Section 27.