Audit of compliance of EPF act

Introduction: EPF Act 1952, requires certain organizations to contribute towards the provident fund and pension scheme for employees. For an auditor, it is imperative to understand various provisions of the Act to verify whether the auditee is complying with the Act or not.

Analysis: The question that needs to be answered are as follows:

Question 1: Which organization needs to comply with the Act?
Question 2: Which employees will be covered?
Question 3: How the amount of contribution will be calculated?
Question 4: What are the consequence of non-compliances?

Now, one by one, we will analyze the provisions of the Act to get the answers to the abovementioned questions.

Answer 1; The section 1 of the Act states that it is applicable in whole India except J&K. It is applicable on factories employing more than 20 employees during the year and on any other establishment, as specified by Central Government in this behalf, in official Gazette employing more than 20 employees during the year.

Note: The Act once applicable is always applicable. Section 2A of the Act states that Establishment includes its branches also. So for the purpose of the applicability and payment of contributions employees employed at various branches shall also be included.

Section 2f defines employee and it gives wide definition of the employee. It states any person who is employed for wages in any kind of work, manual or otherwise, in or in connection with the work of an establishment and who gets his wages directly or indirectly from the employer and includes any person employed by or through a contractor, engaged as an apprentice.

Note: Apprentice here does not include an apprentice engaged under the Apprentices Act, 1961 (52 of 1961) or under the standing orders of the establishment. There is no condition as to a minimum number of days for which employee should be in employment to be considered for calculation number of employees for applicability. The section 26 (2) of the Act says the employee not already member shall be entitled to become a member on joining the organization so it reasonable to deem that definition of employee covers all employees who join the organization and work even if for one day.

Answer 2: Not all employees are eligible for the benefit under this Act. Employees drawing 'Pay' exceeding 15000 are not eligible for the benefit under this Act. Section 2f of the Act defines 'Pay' and it includes basic wages with dearness allowance [retaining allowance (if any) and cash value of food concessions admissible.

Note: The limit prescribed under the Act has changed time and again the current limit is Rs. 15000 previously it was 6500. Consequently, the ambit of the Act has expanded. 

Answer 3: Now, That's the most critical part. As per section 29, the contributions payable by the employer under the Scheme shall be at the rate of 12% of the [basic wages, dearness allowance (including the cash value of any food concession) and retaining allowance (if any) payable to each employee to whom the Scheme applies. 

Note:  For a small-scale organization where a number of employees is less than 20 or any sick industrial company or organization working under certain industries the rate shall be substituted by 10%. 

Note: If employer so desires, be an amount exceeding prescriber rate of his basic wages, dearness allowance and retaining allowance (if any) subject to the condition that the employer shall not be under an obligation to pay any contribution over and above his contribution payable under the Act.

Note: Out of total contribution of 12%, 8.33% is diverted towards EPS (Employee Pension Scheme). Only Employer's contribution is diverted to EPS, not Employee's.

Note: The contributions are payable on Basic wages plus DA and t should, however, be noted that not all of the employer’s share moves into the EPF kitty. Out of employer’s contribution, 8.33% will be diverted to Employees’ Pension Scheme, but it is calculated on Rs 15,000. 

Note: If salary revised then raised to more than Rs.15, 000, then in that case too, member must continue with this scheme. So for example, this month your salary is Rs.14, 000 and you are a member of this scheme. But in March 2015 your salary revised and crossed the limit of Rs.15, 000 then too, you need to continue with this scheme.

Note: EPF needs to be paid on basic wages and DA given in arrears also as it forms part of emoluments. 

Note:  When a registered employee joins another firm there will be following consequences in following situations:

1. New organization is registered: If a new organization is registered and wages exceeds the limit employee has an option to opt the scheme.
2. New organization is not registered: There will not be any requirement to of paying contributions. 

Answer 4: Section 14 of the Act states the penalties on default in complying with the provisions of the Act.

Hope it was helpful.