Following the interim budget, provisions of the Income Tax Act, 1961 (IT Act) with a sunset date of March 31, 2014 have been a hot discussion topic. One such important matter is the non-provision of exemption from Employees’ Provident Fund and Miscellaneous Provisions Act, 1952 (EPF Act) with regard to privately managed provident funds (PFs) by companies.
A privately managed PF is recognised for income tax purposes if it has been granted recognition by the chief commissioner of income tax. With a view to creating legislative synergy between the EPF Act and the IT Act, the Finance Act, 2006 (FA) laid down that all PFs (existing before March 31, 2006 and even those formed after March 31, 2006) should obtain PF exemption for the grant of tax recognition.
The Finance Acts have been extending the deadline for obtaining certificate from the labour ministry, with the last extension up to March 31, 2014. It was not extended in the interim budget presented on February 17, 2014.
In the absence of such an exemption, there would be wide-reaching consequences for both the employer and the employee. The deduction from business income for payments to unrecognised PFs will not be allowed as expenditure to employer, and the employer’s contribution and the interest accruing on the accumulated PF balance would be taxable in the hands of the employee. Also, deduction from taxable income to the extent of the employee’s contribution would not be allowed to the employee.
Though the IT Act specifically grants power to tax authorities to grant recognition retrospectively, there are conflicting provisions. While, on the one hand, no provision exists for automatic de-recognition of an existing recognised PF for non-compliance with the condition of obtaining exemption by March 31, 2014, on the other, there are provisions contemplating that the recognition of existing PF shall be withdrawn if compliance is not done by March 31, 2014.
Considering the number of PF trusts, the substantial number of employees that would be affected, and the fact that deadlines have frequently been extended in the past, there is general expectation that the deadline may again be extended in the regular budget. In the absence of such an extension in the regular budget, all withdrawals from April 2014 onwards would be taxable in the hands of PF subscribers.
It is imperative for employers to provide relevant information to EPFO to obtain the exemption certificate. Additionally, all employees contributing to PF should check if the PF trust they are contributing to has received a clear signal from the EPFO as well as the tax department to protect possible tax on retirement savings.
The writer is senior tax professional, EY. Views expressed are personal.