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UNCLAS SECTION 01 OF 03 MUMBAI 000186 
 
SENSITIVE 
SIPDIS 
 
PASS TO USTR 
 
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 
 
MUMBAI 00000186  001.2 OF 003 
 
 
¶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 
 
------------------------------- 
 
 
 
¶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 
 
------------------------------- 
 
 
 
MUMBAI 00000186  002.2 OF 003 
 
 
 
¶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 
 
-------------------------------------------- 
 
 
 
¶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 
 
MUMBAI 00000186  003.2 OF 003 
 
 
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