At least 2,000 Indian and multinational companies managing their own provident fund trusts are likely to lose the tax relief on contributions they make to the fund because of the labour ministrys inefficiency.

Employees at these firms, too, may be asked to pay tax from January on their contributions to the retirement fund.
It is mandatory for companies in the country to deduct 12% of an employees basic pay and deposit it in the provident fund. Companies are also required to contribute a matching sum in the fund.

PF contributions are usually tax-free. The finance ministry had in its 2006 Budget asked companies managing their own PF trusts to get an exemption licence from the state-run Employees Provident Fund Organisation to be able to retain the tax sop. It had given them one year to obtain the licence.

But the deadline had to be extended several times as the labour ministry and the PF office failed to clear all the cases.

In July 2009, finance minister Pranab Mukherjee had given the labour ministry 18 more months to clear the backlog.

But labour ministry data secured by The Economic Times shows that only 89 companies have been issued the licences between April 2007 and April 2009.

Since then, less than 100 cases have reached the EPFO board for clearance. A company-run PF trust needs to seek the central and the concerned state governments approval after its application has been cleared by the EPFO board.

People close to the matter say as many as 233 applications are stuck due to the failure of regional PF officers to clarify minor doubts raised by the head office more than a year ago.

These include applications made by multinationals like Ericsson, Adobe Systems and Bank Of America. Observers say at least 2,000 other applications are pending.

Worried about being held responsible for eligible PF trusts losing their tax benefits , Central PF Commissioner Samirendra Chatterjee wrote to regional PF commissioners in November to clear all pending cases by the end of the month. Zonal heads were also asked to seek an explanation from concerned officers and take disciplinary action in case of delay.

Yet, in the board meeting held last week, not a single case was presented for approval. This indicates that the backlog persists. With less than a fortnight to go before the taxmans deadline, the picture is bleak for these PF trusts.

The revenue department is unlikely to extend the deadline as any new norms introduced in the Finance Act can only be amended in a full budget. This means that PF contributions made by firms on behalf of workers in the last quarter of 2010-11 would be taxable. Moreover, employees would also be unable to claim PF contributions as tax-free under Section 80 C of the Income Tax Act.

Labour minister Mallikarjun Kharge and labour secretary P C Chaturvedi had assured that due care would be taken so that peoples hard-earned retirement savings are not left in a lurch, Saraf said.

Amitabh Singh, partner (tax and regulatory services) at Ernst and Young is hopeful that the tax department would not revoke the benefits of PF trusts for the failure of a government department to clear its backlog.