No guarantee your EPF will earn 8.5 per cent

Union Minister of Labour and Employment Oscar Fernandes may have declared an 8.5 per cent Employees8217; Provident Fund rate for 2006-07...

Union Minister of Labour and Employment Oscar Fernandes may have declared an 8.5 per cent Employees8217; Provident Fund EPF rate for 2006-07, but there is little possibility of PF accounts being credited with the declared interest anytime soon. In fact, even the rate of 8.5 per cent cannot be considered final, as the Finance Ministry is skeptical of the basis on which it was decided and will not notify the rate unless it is convinced that the EPFO actually has the funds within its coffers to pay the rate.

While EPFO8217;s earnings for the year were enough to pay 8 per cent, under pressure from the Left parties to retain the rate at the 2005-06 level of 8.5 per cent, Fernandes had set up a sub-committee of EPFO board members to audit EPFO8217;s accounts for any available surplus that could fund the Rs 450-crore deficit. Though the committee originally found a deficit of Rs 339 crore in the EPFO8217;s Interest Suspense Account, when Fernandes asked them to make one last attempt to find a surplus this May, the same panel managed to find a surplus of Rs 590 crore.

The Finance Ministry, whose Departments of Expenditure, Budget and Economic Affairs would have to okay the Labour ministry-recommended rate before Finance Minister P Chidambaram can sanction its notification, is not convinced about the audit panel8217;s about-turn. In fact, the ministry is likely to ask the EPFO8217;s statutory auditor, the Comptroller and Auditor General of India CAG, to validate whether the said surpluses actually exist.

A senior Finance Ministry official told The Indian Express, 8220;We can only rely on EPFO8217;s audited accounts to ascertain if there are any surpluses. Even the EPFO8217;s chief financial officer financial adviser had refused to concur with the audit committee8217;s findings at last week8217;s board meeting. Though it was said that his views would be placed on record, our board representative had also stressed that these numbers cannot be a matter of negotiation8230;8221;

In fact, apart from the verbal objection in the board meet, the EPFO had recorded its opinion disputing the audit panel8217;s findings in a statement that was placed before the Board along with the audit panel8217;s report. 8220;The liability of EPFO starts accruing immediately after receipt of contribution; however, EPFO accounts are not maintained on the lines of accounting organisations using accrual concept.8221;

Further, the EPFO had stressed that 8220;the exact interest liability cannot be ascertained even at the close of a financial year; therefore, it is beyond the competence of the EPFO to ascertain whether any distributable surplus actually exists in the Interest Suspense Account8221;8212; a statement that raises questions not just about the interest rate for 2006-7 but the entire process of setting the PF rate on the basis of estimated earnings and liabilities at the beginning of a year.

While leaving it to the Board to recommend an 8.5 per cent rate 8220;if the said estimated surplus is agreed to and considered to be distributable8221; by board members, the EPFO delicately sidestepped being party to the decision stating that 8220;it is beyond the competence of the EPFO to ascertain whether any distributable surplus actually exists in the Interest Suspense Account8221;.

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A tussle between the Finance and Labour ministries on the PF rate is not uncommon in the past few years but this time, it is different. A bulk of the Rs 1,380 crore needed in the last three years to pay higher interest rates than warranted by EPF8217;s income, was drawn from a Special Reserve Fund SRF whose surplus was not in doubt at the time. The only quandary for the Government was moral 8212; the fund was meant to pay the PF claims of employees whose employers had turned defaulters, not to artificially boost the interest income for all PF subscribers.

By contrast, the 2006-07 rate has been recommended on the basis of the audit panel8217;s 8220;interpretation8221; of EPF8217;s accounts for the last five years, as only Rs 56 crore is left in the SRF account. Combined with EPFO8217;s dissent note and the fact that the EPF Act, 1952, doesn8217;t allow for any Government dole to pay higher interest, the Finance Ministry will find it hard to notify the 8.5 per cent PF rate, unless it is able to pinpoint the surplus. Your annual PF account slip for 2006-7 will have to wait till then.