India Regulatory Brief: Legacy Tax Issues Set for Committee, EPF Amendment Likely

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Legacy Tax Issues Set for New Committee

Finance Minister Arun Jaitley has said that the government will set up a high-level committee to review tax issues. The proposed committee is expected to try to contain the fallout from the Minimum Alternate Tax (MAT) levy on foreign portfolio investors, as well as related court disputes with Vodafone, Nokia and Cairn Energy. In a recent media interview, Jaitley stated that the decision to implement the MAT tax was taken not by the government, but by quasi-judicial bodies created before the government came to power.

Although these issues do not often affect small and medium sized businesses, the MAT controversy, along with other high profile tax disputes, has led many foreign investors to question the business friendly image Narendra Modi’s government has presented. If the proposed committee is created, it will only consider legacy tax cases – tax demands arising from actions that authorities took before the current government came to power. However, Jaitley has ruled out retrospective amendments to tax laws for the benefit of investors, which means that any such changes will have to come in the interpretation of current laws.

Costly Provident Fund Amendment Proposed

The Labor Ministry has proposed an amendment to the Employees’ Provident Funds and Miscellaneous Provisions Act of 1952. Among other reforms, the ministry has suggested that workers should be able to choose between an Employees’ Provident Fund (EPF) scheme fund by the Employee’s Provident Fund Organization (EPFO) or the New Pension Scheme (NPS). The EPF is a guaranteed scheme run by the government, while the NPS will invest in the market.

In the proposal, the Labor Ministry has advised a redefinition of wages to include both basic pay and all allowances paid to workers when calculating provident fund deductions. If this redefinition is included in any amendment, employers would no longer be able to split wages into separate allowances to decrease provident fund liability.  This would increase the provident fund contribution by both workers and employers.

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Bill Could Finally Ban Child Labor

The Labor Ministry has taken steps to ban the employment of children under the age of 14 years old. Child labor laws at present do not include adolescents between 14 and 18 years old – it only bans the employment of children under 14 in certain hazardous industries.

If the Child Labor (Prohibition and Regulation) Amendment Bill is passed, the employment of children under the age of 14 years old will become illegal and the punishment for employing children will increase from one to two years in jail. The associated fines would also be increased from Rs. 20,000 (US$314.12) to Rs. 50,000 ($785.30).

The bill, however, has made an exception for children helping their family in field, forest or home-based work, as long as the work is done after school hours. The proposed reform is part of an attempt by the Labor Ministry to harmonize the Child Labour Act with the Right to Education Act, which makes education compulsory for all children up to age 14.


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