India-Australia Deal to Avoid Double Social Security Contribution

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By Siddhartha Thyagarajan

India and Australia recently signed a pact to avoid double social contribution, aimed to help businesses in both countries. Social security payments are a critical component of a company’s expenses. An employer often has to structure social contribution payments in a manner that ensures regulatory compliance, while also taking care of the company’s bottom line. The exercise of social contribution becomes more complex when employers have a presence in numerous countries and often depute employees from one country to another.

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Several laws in India and Australia determine the exact amount of social contribution that employers need to make. The overlap in such laws often creates a scenario where employers would potentially pay social contribution in both countries. The pact that was recently signed by India and Australia seeks to avoid these double payments.

The key laws that determine the social security payments for employees in India include:

  1. The Employees’ Provident Fund and Miscellaneous Provisions Act, 1952;
  2. The Employees’ State Insurance Act, 1948;
  3. The Employees’ Compensation Act, 1923;
  4. The Maternity Benefit Act, 1961; and
  5. The Payment of Gratuity Act, 1972.

The most important law among these for Indian companies is the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952 (EPF Act). The EPF Act is federally administered through the Employees’ Provident Fund Organisation (EPFO). The EPF Act mandates that in companies with more than 20 employees, employers and employees have to devote a minimum 12 percent of their basic salary, inflation/dearness allowance, and retention allowance as monthly Provident Fund contributions. 

The signing of the pact with Australia will ensure that employees from India that have been deputed to Australia and vice-versa will make social contribution in only one country, thereby avoiding double payments. The EPFO has issued a directive stating that for employees that have been sent on assignments of up to 60 months from one country to another, the employer does not need to remit social contribution in the country where the employees have been posted. The pact took effect from January 1, 2016. The act applies once Indian and Australian companies obtain a Certificate of Coverage (CoC) for their employees working between India and Australia.

The pact will entail several benefits for citizens of both countries. Australians who work in India will be exempt from social security payments in India. However, if payments are made in India, then Australian nationals will be able to access early withdrawal facilities from the Provident Fund on the completion of their assignment in India. In addition, such employees will also be eligible for the pension scheme. The pact also enables Australian nationals to receive refunds from the EPF in foreign bank accounts.

For Indian employees working in Australia, the pact will ensure exemptions from social contributions in Australia. In addition, under the Indian tax regime, the Indian employees will be deemed “local employees” in India, despite working outside India. India’s law states that Indian employees who are ineligible for any host country’s social security will not be deemed as “international workers”.

The pact necessitates some critical actions for employers who have employees assigned between India and Australia. All such employers should examine and assess their employee contracts in order to determine future legal liability and the economic cost. Employers should establish if CoCs are available dependent on the nature of the work undertaken. They should also reassess the planned assignments to ensure that they are operating in full cognizance of the employment cost. In some scenarios, the employers should prepare all necessary paperwork and start early applications for CoCs to ensure that the periods of deputation in other countries is fully documented and legally compliant. One of the most critical components of the employer obligations is to review the payroll process to ensure that the salary and associated social security payments are amended accordingly. In addition, companies must also inform employees about the implications that the India-Australia pact will have on their compensation packages.

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Observations

Companies that take the aforementioned basic steps stand to ease the burden of regulatory compliance and reduce the economic risk of paying double social payments. The steps will also simplify operations for companies that often send employees from India to Australia and vice versa. The pact is seen as a part of a wider gamut of policies that the current government is signing in order to improve the ease of doing business in India.

India now has similar agreements with 16 countries, namely Belgium, Korea, Finland, Sweden, Czech Republic, Hungry, Germany, France, Belgium, Netherlands, Luxembourg, Denmark, Norway, Austria, Canada, and Switzerland. Each agreement aims to improve ease of doing business. However, all agreements differ in their specificities. Companies that are operating in any of these countries and have employees working in India often stand to gain significantly from abiding by such agreements. Employers who assess these agreements carefully will be able to leverage such pacts to their advantage.

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