October

Update: The ESI wage ceiling enhancement to Rs 21,000 has been notified. Please read the relevant post here.

The Ministry of Labour and Employment has, by way of a gazette notification, sought feedback regarding enhancing the ESI wage limit from Rs 15,000 per month to Rs 21,000 per month.

As you are aware, the current limit is Rs 15,000 – in other words, employees who draw an ESI wage of more than Rs 15,000 cannot come under ESI currently. If this proposal is implemented, employees drawing an ESI wage of up to Rs 21,000 will need to become ESI members.

As far as your organization is concerned, you may see some of the current employees (whose salary is between Rs 15,000 and Rs 21,000) getting into ESI for the first time on account of the wage ceiling enhancement. Also, there could be an increase in the cost to company on account of employer ESI contribution to such employees (who get added to ESI).

Should this be implemented for Oct 2016 payroll?

As of 22-Oct-2016, the date of this post, the wage limit enhancement to Rs 21,000 is still at the proposal stage. According to the gazette notification, all stakeholders can give feedback to the ministry on the proposal until the end of 30 days from the date of the notification (06-Oct-2016). The government will make a final decision on this after considering the feedback received, and publish a final notification if the wage ceiling enhancement is to be given effect.

Many payroll managers wish to know if the wage ceiling enhancement should be given effect for Oct 2016 itself. To our knowledge, some payroll managers have already implemented this for Oct 2016. Their argument is that the proposal will definitely be given effect from 01-Oct-2016 and hence they are better off implementing this in Oct 2016 payroll. We wonder on what basis they are so sure that the proposal will be implemented. Surely, hearsay cannot be the basis for implementing such an important change. What if the government does not implement this at all or implements this prospectively (and not from 01-Oct-2016)?

Our take

We need to wait for the final notification from the government for us to implement this in payroll. There is no legal basis for implementing this for Oct 2016 payroll when the government is yet to issue the final notification. In other words, no payroll manager should second-guess governmental decisions.

As far as future is concerned, there are 3 possibilities.

Scenario 1: The wage ceiling enhancement does not get implemented by the government.

Action required: Nothing, since it would mean status quo with regard to ESI wage limit.

Scenario 2: The wage ceiling enhancement gets implemented in November 2016 or later with prospective effect.

Action required: You will have to implement this in payroll from the date from which it is given effect by the government.

Scenario 3: The wage ceiling enhancement gets implemented in November 2016 with retrospective effect (say, from 01-Oct-2016).

Action required: If the wage ceiling enhancement is given effect from 01-Oct-2016, you will need to re-run Oct 2016 payroll as soon as the notification comes (say, in Nov 2016 first or second week before the deadline for Oct 2016 ESI remittance) and ensure that you do the ESI deduction for the additional employees in Oct 16 payroll. Since you would have completed Oct 16 payroll processing by the last week of Oct 2016, you will need to decide on how to recover the ESI deduction for Oct 16 from the individual employees (whose salary is between Rs 15,000 and Rs 21,000 in Oct 2016). Of course, documents such as salary register and payslip would undergo a change for the employees who are impacted.

We hope the government takes into account the problems that employers are likely to face in implementing wage ceiling enhancement retrospectively, while announcing its final decision in this regard.

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The Employee Provident Fund Organization (commonly referred to as the PF Department), has notified (dated 26-Sep-2016) a form called New Form No. 11. This replaces the earlier Form No. 11 (New).

Form No. 11 – what is that for?

While many payroll managers know that employees need to submit Form No. 11, not many seem to be aware of the importance of Form No. 11 particularly in the light of the PF Department’s notification dated 29-Aug-2014. In fact, in many organizations, new employees are not even asked to submit Form No. 11 and this leads to inadequate PF compliance.

Form No. 11 is the document through which a new employee submits their PF information to their employer. The key information contained in Form No. 11 are as follows.

a. Employee’s prior PF status – whether member or not.

If an employee was a member of PF during their previous employment, they cannot be left out of PF in the new organization as long as their earlier PF amount was not withdrawn. We find many payroll managers not being fully informed about the rules under which a new employee may be left out of Provident Fund. Some are under the impression that if an employee’s PF wage is more than Rs 15,000 per month, they can be automatically left out of PF. This is wrong. If an employee submits his PF information in Form No. 11, the employer has to include the employee for PF.

b. If PF member in his previous organization, then was the employee a member of EPS?

The notification dated 29-Aug-2014 notifies an important change related to Employee Pension Scheme (EPS). According to the notification,

As EPS will henceforth apply only to EPF members whose pay at the time of becoming a PF member is not more than Rs.15,000 per month on or after 01.09.2014, the entire employer and employee contribution shall remain in the provident fund and no diversion shall be made to EPS for all new PF members on or after 01.09.2014 having salary more than Rs.15,000 at the time of joining.

Effective 01-Sep-2014, any new employee who becomes PF member for the first time and whose salary is higher than Rs 15,000 cannot be a member of EPS. In other words, the entire 12% contribution should be placed under Employee Provident Fund and there shall be no contribution to Family Pension Fund.

But what if a new employee was under EPS in their earlier employment?

In such a case the employee should come under EPS in their new organization even if the employee’s salary is higher than Rs 15,000.

The Form No. 11 requires the employees to state whether or not they were a member of EPS in their earlier organization. On the basis of the employee’s declaration in Form No. 11, the employer should include/exclude him in/from EPS.

We find many payroll managers complaining that they are unable to get the correct information regarding EPS applicability from new employees. Some say that the new employees are just unable to clearly state whether they were under EPS in their previous organization. Many employees do not even seem to know how the 12% contribution is bifurcated and what EPS is. Consequently, in many organizations, all new employees are brought under EPS whether or not they are eligible for it, as an easy way out.

c. Other information
Form No. 11 also presents other information such as details of an international worker (if applicable) and KYC details.

The PF Department requires that the New Form No. 11 – Declaration Form be “retained by the employer for future reference.” You may be aware that the PF Department has enabled online transactions for PF transfer and withdrawal and hence it is extremely important that new employees provide accurate information regarding their PF status by submitting Form No. 11.

If you are responsible for PF compliance in your organization, please ensure that you get a signed copy of New Form No. 11 from new employees as soon as they join your organization. In addition, please get the employer declaration in the form duly signed, and store the New Form No. 11 for future reference.

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The Ministry of Labour and Employment, Government of India, has amended the Employees’ State Insurance (Central) Rules, 1950 by introducing a new rule called Rule 51B, stated as follows.

“51B. In areas where the Act is implemented for the first time, the rates of employer’s and employee’s contribution for the initial twenty-four months from such date of implementation, shall be as under:-

(a) Employer’s contribution – A sum (rounded to the next higher rupee) equal to three per cent of the wages payable to an employee; and

(b) Employee’s contribution – A sum (rounded to next higher rupee) equal to one per cent of the wages payable to
an employee:

Provided that on completion of twenty-four months from the date of implementation of the Act, the rate of contribution as provided under rule 51 shall be applicable.”

You can read the gazette notification dated 06-Oct-2016 here.

What does the notification say?

As per Rule 51 of the Employees’ State Insurance (Central) Rules, 1950, the employer’s contribution to ESI is 4.75% of an employee’s ESI wage while the employee contribution is 1.75% of the employee’s ESI wage.

The Employee State Insurance Corporation continually expands its operations to cover new areas all over India. According to the notification, the ESI calculation for new ESI locations shall be as follows.

Employer contribution: 3% of wage, rounded to next higher rupee
Employee contribution: 1% of wage, rounded to next higher rupee

The above rates shall be in force for a period of 24 months from the time a new ESI location is introduced. After 24 months from the date of implementation of a new ESI location, the ESI calculation shall be as per Rule 51 (Employer contribution at 4.75% of wage and Employee contribution at 1.75% of wage).

In case your organization has operation in a place where ESI is implemented for the first time, this notification shall be relevant to you. Given that the ESI remittance happens for each location code, we presume that the ESI portal will be able to validate the ESI contribution calculations as per the rates notified for new ESI locations.

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Someone asked us a question on Form 16 recently.

In case an employee has no tax liability and hence no tax is deducted from the employee’s salary, can/should the employer issue Form 16 to the employee?

The typical answers we come across are as follows.

a. Form 16 cannot be issued to an employee with zero tax. This is because Form 16 can be generated only if tax is deducted from an employee’s salary.

b. Part A of Form 16 cannot be issued while Part B alone can be issued.

Both the above answers are wrong.

The question has 2 parts – whether an employer can issue Form 16 to a zero tax employee and whether an employer should issue Form 16 to a zero tax employee.

Can Form 16 be issued?

A Form 16 comprises 2 parts – Part A (downloaded from the TRACES site) and Part B (prepared by the organization issuing Form 16). Any organization can create Part B. However, for Part A to be available on the TRACES site, an organization has to include the employee record (including zero tax employees) in Annexure II of the fourth quarter (Jan – Mar) Form 24Q.  You would be aware that Part A also contains information on salary paid to an employee and the tax deducted from an employee’s salary for each of the 4 quarters. Hence, for the salary and tax figures to appear in Part A, the employee record should also feature in Annexure I of Form 24Q. In fact, the employee record need not feature in Annexure I in Form 24Q of all quarters. Please note that if the employee record features in Annexure I of only one Form 24Q and Annexure II of the fourth quarter of Form 24Q, his Part A will be available for download on the TRACES site. Just that the fields (in Part A) pertaining to salary and tax amounts for the quarters in which the employee record is not included in Annexure I will be shown as blanks.

Once Part A is downloaded from the TRACES site, the organization can create Form B, and issue the signed Form 16 to a zero tax employee.

Here is a screenshot of Part A for an employee with no TDS.

So, can Form 16 be issued to a zero tax employee? Of course, it can be issued!

Should Form 16 be issued?

As per the diktat issued by the Income Tax Department, an organization need not include an employee record in Form 24Q until the quarter any tax is deducted from the employee’s salary. Once tax is deducted in a quarter, the employee should feature in Form 24Q for that quarter and the subsequent quarters until end of the year as long as the employee receives salary, even if no tax deducted in any of the subsequent quarters. Let us explain this with examples.

An employee works for the entire year and receives salary for all the 12 months.

1. Tax deducted in the first quarter.

The employee should feature in Form 24Q of all 4 quarters.

2. Tax deducted in the third quarter; no tax in the first 2 quarters.

The employee should definitely feature in Form 24Q of third and fourth quarters. The employer can choose to include or exclude the employee in Form 24Q for the first and second quarters.

3. No tax deducted in all four quarters.

The employer, at their discretion, can choose to include or exclude the employee record in Form 24Q.

So, should Form 16 be issued to a zero tax employee? It is up to the employer.

Since it is not mandatory for zero tax (for the whole year) employees to feature in Form 24Q, many employers do not issue Form 16 to zero TDS employees. However, there are also many employers who issue Form 16 (with both Part A and Part B) to zero TDS employees.

A word on the department’s diktat

We wonder why the Income Department does not insist on employers including zero tax employees in Form 24Q. Form 24Q presents not only tax figures but also salary figures. There can be instances where the Income Tax Department may never get to know instances of tax evasion because of this.

For example, let us assume that an employee works for 2 employers in the year 2016-17 and receives Rs 2.4 lakh from each employer. Both the employers do not deduct tax since the employee receives a salary which is in the zero tax bracket and both the employers decide not to include the employee record in their Form 24Q filings for the year.

This is a case where an employee receives Rs 4.8 lakh in a year and is liable to pay a certain tax. Since the employers do not show the employee record in their Form 24Q filings, the Income Tax Department will never get to know the salary of the employee. If the employee does not pay the tax by himself and file his tax return, the Income Tax Department may never be able to levy tax on the employee’s salary.

The whole process of Form 24Q needs a revamp. But that is a topic for another day.

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