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The Employees Provident Fund Organisation (EPFO) has issued a circular no.345 dated 30.11.2012 to the Additional CPFCs, Provident Fund Commissioners and Assistant PF Commissioners regarding Guidelines for Quasi-judicial proceedings under Section 7A of the Employees' Provident Funds & Miscellaneous Provisions Act 1952.
However, I would like to invite your attention to point no. 12 of the circular where-in basically, the circular has clarified the manner of interpreting sec. 2(b) relating to definition of “Basic Wages” of Employees' Provident Funds and Miscellaneous Act, 1952.
1. The definition of “Basic Wages” u/s 2(b) is as follows:
Sec 2: Definition
(b) “Basic wages” means all emoluments which are earned by an employee while on duty or on leave or on holidays with wages in either case in accordance with the terms of the contract of employment and which are paid or payable in cash to him, but does not include-
(i) The cash value of any food concession;
(ii) Any dearness allowance that is to say, all cash payments by whatever name called paid to an employee on account of a rise in the cost of living, house-rent allowance, overtime allowance, bonus, commission or any other similar allowance payable to the employee in respect of his employment or of work done in such employment;
(iii) Any presents made by the employer;
2. Second last line of point 12 of the Circular says that:
Thus "basic wages" is subject to exclusions expressly referred to in the above definition and no other.
Explanation: It means that, only the items which are expressly (i.e. specifically) mentioned in Sub-clauses (i), (ii) and (iii) are to be excluded for computing PF.
3. Until now, employers were splitting the wages into various allowances; keeping the Basic + DA on a lower side to avoid high contribution to PFO, thereby increasing the employees cash Income. The words in sub-clause (ii) which mentions “any other similar allowance payable” was interpreted to be “any other allowance payable”.
4. However, vide aforesaid circular, the same has been clarified that “any other similar allowance payable” should not be read in isolation but the words “commission or any other similar allowance payable” should be read together. Therefore, it can be implied that only items mentioned in sub-clause (ii) should be excluded and no other items such as Mobile re-imbursement, medical re-imbursement, Conveyance Allowance, Night Shift allowance, etc. shall be excluded.
5. However, I am not sure if the same Circular is binding on the employer. May be it is similar to the circular issued by CBDT on pharmaceutical companies regarding gifts. Circulars not binding on the Assessee - A Practical Analysis
6. I strongly feel that instead of issuing such circular clarifying an ambiguous provision, they could have amended Section 2(b)(ii) itself by inserting the word “and” in between the words bonus and commission’ as follows:
(ii) Any dearness allowance that is to say, all cash payments by whatever name called paid to an employee on account of a rise in the cost of living, house-rent allowance, overtime allowance, bonus and commission or any other similar allowance payable to the employee in respect of his employment or of work done in such employment.
Hope, the info was useful! Feedbacks are welcome. Contradictory views are also welcome for discussion. Please correct me if I have interpreted any of the provisions wrongly.