Pioneer eServe Pvt Ltd

1. Audit of Provident Fund Trusts By Sushil Kumar Jain, FCA ACS June 18, 2005 Pioneer eServe Pvt Ltd Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 1

2. AUDIT OF PROVIDENT FUND TRUSTS • Introduction • Formation of PF Trusts • Audit of PF Trusts • Recent Changes and Challenges Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 2

3. Introduction What is a Provident Fund ? It is a mandatory, tax-qualified, defined, contribution retiral benefit plan wherein equal contribution at the specified rate is made by the employer and the employee and the same is payable in lump sum on retirement. Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 3

4. Introduction Relevant Statutes are : • Employees Provident Fund & Miscellaneous Provisions Act, 1952 • Income Tax Act,1961 • Provident Fund Act, 1925 • Indian Trusts Act, 1882 Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 4

5. Introduction Following three Schemes framed under the EPF & MP Act, 1952: • Employees’ Provident Fund Scheme, 1952 - came into force from 1st November, 1952 • Employees’ Family Pension Scheme, 1971 - came into force from 1st March 1971 Later replaced by Employees’ Pension Scheme, 1995 with effect from 16th November, 1995 • Employees’ Deposit Linked Insurance Scheme, 1976 - came into force from 1st August, 1976 Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 5

6. Formation of PF Trusts • Options • Total Compliance with RPFC • Covered Trust for All Members • Excluded Trust for Excluded Employees with Approval under Schedule IV part A of the Income Tax Act, 1961 • Trusts for Both Covered and Excluded Employees Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 6

7. Formation of PF Trusts Definition : "Excluded Employee" an employee of the Company to whom both of the following two conditions apply at the time of the coverage of the Company under the Employees' Provident Funds & Miscellaneous Provisions Act, 1952 or at the time of his joining the services of the Company, whichever is later. i  His pay at the relevant time is more than Rs 6500/- per month. ii He does not have any current PF Balance.  Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 7

8. Formation of PF Trusts • An Excluded Employees' Trust is one, • which does not come under the purview of the PF Department, • but its policies are framed based on the PF Act. • The regulatory Statute is the Income Tax Act, 1961. • The rate of contribution by the member can be any amount not exceeding his basic salary including DA (if any) • The employer can decide to contribute any amount up to 12%. Employer contribution above 12% is taxable in hands of employees • Employee Contributions eligible for Sec. 88 rebate / 80C Deduction Interest on Employer and Employee contributions are tax free • However, withdrawls before completion of 5 years of membership, become taxable in year of withdrawal with condtitions. Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 8

9. Formation of PF Trusts • Apart from the financial benefits, some very important benefits become available to employees who are members of voluntary PF Trusts in comparison to the unexempted establishments : • Easy Availability of advances • No hassles of Dealing with Public Departments • Availability of Refundable advances • Faster transfer of accumulations for outgoing members • Faster settlement of final dues Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 9

10. Formation of PF Trusts Coverage • Establishments employing 20 or more persons and engaged in any of the 177 industries / Businesses specified. • Co-operative Societies, employing 50 or more persons & working without the aid of power. • Establishments not coverable statutorily can opt for coverage. • An establishment continues to be covered under the Act, irrespective of fall in the employment strength. • Since the Act applies on its own force to the establishments, the employers are required to file the particulars in the specified format for registration and allotment of business number. Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 10

11. Formation of PF Trusts When can a company opt to set up an Exempted Trust ? • Covered under the provisions of the PF &MP Act, 1952 • Profit making Company • 20 employees • Pass a Board Resolution • File for exemption with the RPFC • Apply to the CIT for recognition of PF Trust • On receipt of the approval from RPFC the Trust can comply as “Exempt” Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 11

12. Cost Benefits Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 12

13. Formation of PF Trusts • EPS deduction, to be paid to the RPFC cannot be made from the Employee's contribution. • The EPS deduction of 8.33% can be made only from the employer's contribution of 12% of Basic and DA. • This is capped at Rs.6500/- Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 13

14. AUDIT OF PROVIDENT FUND TRUSTS Contributions: • Statutory rate of contribution is 12% of emoluments (basic wages, dearness allowance, cash value of food concession and retaining allowances if any,) in the case of 177 establishments. • Rate of contribution shall be 10% in case of the following: Brick, beedi, jute, guar gum factories, coir industry other than spinning  sector. • Establishments declared as sick undertakings by BIFR. • Matching contribution is to be collected from the employees • Out of 12% (or 10% as the case may be) of the employer’s share of contribution, 8.33% is to be remitted towards pension fund. • Employer is also required to pay a contribution of 0.5% of the emoluments towards EDLIS’1976. Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 14

15. AUDIT OF PROVIDENT FUND TRUSTS • Specifics : • Interest Payment • Investment Pattern • Valuation of Securities & Amortisation of Premium • Settlements during the year • Advances / Loans • Meetings • Submission of Returns • Health of Securities Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 15

16. AUDIT OF PROVIDENT FUND TRUSTS The Rate of Interest declared by EPFO for FY 2003-04 and FY 2004-05 on PF contributions is 9.5% p.a. An Exempted Trust cannot credit interest less than the statutory rate of interest stipulated even if the Trust is not able to earn the minimum interest. In case of a shortfall, the Company has to make good the deficit. However, An Excluded Employees' Trust / Private Trust may declare interest based on the earnings of the Trust. Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 16

17. Investment Pattern prescribed for Provident Fund Trusts effective April 1, 2003 Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 17

18. AUDIT OF PROVIDENT FUND TRUSTS Effective April 1, 2005, vide Circular no F.No. 5(53)/2002-ECB&PR Dated: January 24, 2005 The Trustees, subject to their assessment of the risk-return prospects, may, if they so decide, divide the total portfolio under Central and State Government categories into tradable and non-tradable categories. Upto 10% of the total portfolio at the end of the preceding financial year can be treated as tradable and may be used for active management. Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 18

19. AUDIT OF PROVIDENT FUND TRUSTS Provided that the tradable portfolio of Government securities shall be marked to market and mutual funds, which have been set up as dedicated funds for investment in Government securities, shall be valued at Net Asset Value at the close of the financial year. Flexible portion being 30% may be invested in any of the three categories as decided by their Trustees Investment may be made in Shares of companies that have an investment grade debt rating from at least two credit rating agencies 5% Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 19

20. AUDIT OF PROVIDENT FUND TRUSTS Valuation of Securities & Amortisation of Premium : Guidelines in AS 13 cannot apply to PF Trusts   Cost Face Value Cost or Market Value whichever is lower Amortise Premium but not discount Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 20

21. AUDIT OF PROVIDENT FUND TRUSTS Amortise Premium but not discount Income exempt   Hold till maturity Trade Valued at lower of cost or market value Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 21

22. AUDIT OF PROVIDENT FUND TRUSTS Settlements during the year A member may completely withdraw the amount that has accrued in his account if: • He retires at the age of 58. • He retires – god forbid – because of permanent and total debilitation. This could be either mental or physical, but must be ‘permanent and total’ -- the scheme distinguishes between partial and total disabilities. • He immigrates or takes up employment abroad. • His services are terminated because of retrenchment in the company. • He chooses to terminate his service under a voluntary retirement scheme. • The establishment he works for shuts down. • The organisation he works for shuts down, and he joins one that does not participate in the EPF scheme. He can withdraw up to 90 per cent of the amount in his credit in the year before he retires -- that is, between the ages of 57 and 58. Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 22

23. AUDIT OF PROVIDENT FUND TRUSTS If an employee brings in a transfer from another approved Provident Fund Trust or RPFC • then the service rendered with such an ex-employer is counted. • Settlement can be done only after a waiting period of two months from the date of resignation • For members going abroad, settlements can be done immediately • Settlements are immediate in case of female members who resign from the services for the purpose of getting married. Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 23

24. AUDIT OF PROVIDENT FUND TRUSTS TDS on settlements • Any payment received from a Statutory Provident Fund,(i.e. to which the Provident Fund Act, 1925 applies) is exempt. • Any payment from any other provident fund notified by the Central Govt. is also exempt. • The Public Provident Fund(PPF) established under the PPF Scheme, 1968 has been notified for this purpose. • Besides the above, the accumulated balance due and becoming payable to an employee participating in a Recognised Provident Fund is also exempt to the extent provident in Rule 8 of Part A of the Fourth Schedule of the Income Tax Act. • There is no tax deduction if the member has put in five years of continuous service with the employer (includes period of past membership with previous employer/s if there is a transfer received). Otherwise, the member is liable for deduction of tax Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 24

25. AUDIT OF PROVIDENT FUND TRUSTS Advances / Loans from provident fund corpus: • To buy life insurance policies. • To buy land, or to build or buy a house. • To repay any loans that he has taken to buy or build a house. • To finance the treatment or hospitalisation of self or any member of the family. • To finance the weddings or college expenses of his children. • In special cases, where the establishment he works for is temporarily shut down, or if his services have been terminated and he has challenged that termination in court. Loans are to be utilized for purpose else provision to add back to income Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 25

26. AUDIT OF PROVIDENT FUND TRUSTS Meetings : to be held once in a calendar quarter Section 17(1A)(d) of EPF&MPAct, 1952 The Board of Trustees constituted shall : maintain detailed accounts submit returns to the RPFC invest the provident fund monies transfer provident fund account of any employee perform such other duties as may be specified Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 26

27. AUDIT OF PROVIDENT FUND TRUSTS Submission of Returns • EPF&MP Act • IT Act Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 27

28. AUDIT OF PROVIDENT FUND TRUSTSHealth of Securities State wise exposure Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 28

29. PSU exposure Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 29

30. Sector wise exposure Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 30

31. Redemption of Investments at maturity Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 31

32. Rating Profile Analysis Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 32

33. Recent Changes ….. and Challenges • Auditors change in two years • Investment Pattern opened up • Rate of Interest • Accounting Standards • Valuation of Investments • FBT – SAF Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 33

34. AUDIT OF PROVIDENT FUND TRUSTS Anamolies : No authentic data available, however, Rs 1,40,000 crore with RPFC Rs 1,40,000 crore in private trusts Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 34

35. Thank you! Sushil Jeetpuria & Co Pioneer eServe Pvt Ltd 35