PF war! This will decide the interest on your savings

The battle over the interest to be paid on Employees' Provident Fund for the current financial year is set to escalate with Finance Minister Pranab Mukherjee and Labour Minister Mallikarjun Kharge getting dragged into it.

Labour Secretary Prabhat C Chaturvedi's letter to Finance Secretary Ashok Chawla on Friday, in response to a letter dated January 11 with regard to the Employees Provident Fund Organisation's decision to give 9.5 per cent interest, has drawn the battle lines.

The outcome of the tussle will decide the fortune of 47.2 million EPF subscribers.

Labour unions, for their part, are ready to add fuel to the fire. All India Trade Union Congress general secretary Gurudas Das Gupta has already written to the finance minister urging him to ensure that EPFO was allowed to have its decision implemented and the ministry of finance did not come in the way.

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The central trade unions plan to raise the issue together at the national level soon.

A senior finance ministry official told Business Standard that the final decision on the 9.5 per cent interest rate -- made using the projected surplus money this financial year -- would now be taken by the finance minister.

Another said the issue was tricky and unlikely to be resolved easily. He didn't rule out another exchange of letters between the two ministries.

The finance secretary's letter of January 11 had said: "It may be recalled that the ministry of finance has been repeatedly pointing out the implications of such practice/arrangement being followed by EPFO while declaring interest rate on EPF accumulations, which is not sustainable in the long run."

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"Further, the audit observations on EPFO accounts unambiguously justify the views of the ministry of finance. The ministry of finance is unable to concur with the proposal of the ministry of labour and employment for interest payment of 9.5 per cent on EPF accumulations for the year 2010-2011," the letter went on.

Chawla concluded the letter with: "This letter is issued with the approval of the finance minister."

The labour secretary's reply has addressed all the issues raised by Chawla and said: "The calculations done in identifying the surplus are thus correct as certified by EPFO and we stand by it "

"We would therefore request that in accordance with the decision taken by the CBT (Central Board of Trustees) of the EPFO the interest at the rate of 9.5 per cent may kindly be approved," the labour secretary's letter said.

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Chaturvedi's letter ends resonating Chawla's: "This has the approval of the labour & employment minister."

Chawla's letter to Chaturvedi said the reason for accumulation of Rs 4,671.83 crore (Rs 46.718 billion) in the Interest Suspense Account was non-updating of 47.2 million member accounts.

The audit, he said, had concluded that EPFO had incorrectly attributed Rs 2,940.25 crore (Rs 29.402 billion) to members on account of interest due to them in the past/up to the end of 2009-2010 and arrived at a net balance of Rs 1,731 crore (Rs 17.31 billion) in ISA.

Chaturvedi's reply said the Comptroller & Auditor General, in its report, had nowhere concluded that EPFO had incorrectly attributed the amount.

. . . 

Chawla had also stressed in his letter that the surplus could not be identified without updating all member accounts and it was incorrect to describe the Rs 1,731 crore as surplus.

The audit, he said, had said that this amount could constitute a liability of EPFO payable to members whose accounts were yet to be updated along with interest.

Chaturvedi has rejected this, too, saying: "It has also been indicated that the surplus cannot be ascertained till all the 47.2 million accounts are updated. This is not correct."

He went on to add that it would make no difference even if all the accounts were updated. "We have taken the overall corpus of all the EPF members at the macro level and calculated the actual interest due on it at the declared rate," he said.

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Another point raised by the finance secretary was that the EPFO income was taken on an "actual receipt basis" while the liability was on "accrual basis on some assumptions".

According to him, it may not be appropriate for EPFO to mix two accounting treatments in the same accounts.

To this, Chaturvedi said both income and liability had been taken on the actual receipt/corpus of EPFO, taken from the balance sheet since 1952-53. He added that the interest had been calculated at the macro level on the total corpus of EPFO each year and not calculated on an accrual basis.

EPFO, according to Chaturvedi, had in its basket some securities amounting to Rs 57,560 crore (Rs 575.60 billion), which were yielding 9 per cent to 14 per cent and contributed to the ISA surplus.

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The EPFO money including ISA was workers' money being paid back to the workers, he said.

According to government insiders, the finance ministry is opposed to an increase in EPF interest rates for 2010-11 to 9.5 per cent because it would pressure the government to raise other administered interest rates, such as post office deposit accounts and PPF.

Secondly, it will be difficult to cut these rates next year if EPFO is unable to sustain the higher interest on its own. The ministry has already notified that up to 8.5 per cent returns from EPF would be tax-free in 2010-11.

CAG's report of December 31 on EPFO accounts for the year ended March 31, 2010, said ISA's Rs 16,998.78 crore (Rs 169.987 billion) included the Rs 4,671 crore (Rs 46.71 billion) available for crediting into EPF subscribers accounts as on March 31, 2010.

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It said interest on 47.2 million member accounts was yet to be credited and was pending as on march 31, 2010.

The actual interest liability was not ascertainable. In its absence, the adequacy of the balance of Rs 4,671.83 crore (Rs 46.718 billion) to meet the future interest liability for pending accounts could not be verified in the audit.

EPFO responded to CAG's report by saying that the actual interest liability could be ascertained only when all the accounts were updated.

The CAG's findings and EPFO's response on the surplus amount have been used by the finance ministry to question the decision to give 9.5 per cent interest.

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Battle of bureaucrats

Ashok Chawla

Point One

The reason for accumulation of Rs 4,671.83 crore (Rs 46.718 billion) in ISA was non-updating of 47.2 million member accounts.

The audit concluded that EPFO had incorrectly attributed Rs 2,940.25 crore (Rs 29.402 billion) to members on account of interest due to them in the past/up to the end of 2009-2010 and arrived at a net balance of Rs 1,731 crore (Rs 17.31 billion) in ISA.

Point Two

The surplus cannot be identified without updating all accounts and it is incorrect to describe the sum of Rs 1,731 crore as surplus.

The audit has observed that this amount could constitute a liability of the EPFO payable to those members whose accounts were yet to be updated along with interest.

Point Three

The income of EPFO is taken on the actual receipt basis, while the liability was taken on accrual basis on some assumptions.

It may not be appropriate for EPFO to mix two accounting treatments in the same accounts and herein lies the basic problem.

Point Four

The finance ministry has repeatedly pointed out that a higher interest rate (9.5 per cent) is not sustainable in the long run.

. . . 

Prabhat C Chaturvedi

Point One

CAG in its audit report nowhere concluded that EPFO had incorrectly attributed Rs 2,940.25 crore (Rs 29.402 billion) to members on the account of interest due to them up to 2009-10.

Point Two

This is not correct. It will not make any difference whether all the 47.2 million member accounts are updated or not.

We have taken the overall corpus of all EPF members at the macro level and calculated the actual interest due on it at the declared rate.

Point Three

We would like to reiterate that the income and the liability both have been taken on the actual receipt/corpus of the EPFO from the balance sheet of the past years since 1952-53.

The interest has been calculated at the macro level on the total corpus of EPFO each year and this is not a calculation on accrual basis.

Point Four

EPFO has in its basket securities worth Rs 57,560 crore (Rs 575.60 billion), yielding 9-14 per cent. These higher yielding securities have contributed to the accumulation of surplus in ISA.

We would like to reiterate the EPFO money, including the interest suspense account is workers' money, which is being returned to them.