Totalization agreements / Social security agreement (SSA) are entered into to help the nationals of one country to remain covered in the social security schemes of their home country or to obtain / enhance benefits from coverage in the host country schemes. CA Rohini Ramya (Partner, Taxkode Consulting LLP), in this article, discusses the totalization agreements that India has entered into with 18 countries so far, to avoid double coverage under a social security scheme. The author highlights that there is no law equivalent to Sec. 90(2) of the IT Act providing for application of beneficial provision in cases of dichotomy between local laws under the domestic social security legislation (PF Act). This leaves employees/employers at the mercy of the EPFO who is likely to decide such questions in favour of the PF Act.  The author speaks about the expectations from the Draft Code on Social Security, 2019 introduced in the Lok Sabha by the Ministry for Labour and Employment in December 2019, will eventually replace nine laws related to social security, including the current PF Act. The author opines that “Including sufficient clarity in the draft Code will go a long way in reducing the regulatory uncertainty businesses and employees will face, if caught between the SSA and the Indian social security legislation.”

Code on Social Security

Whether catching up on a much-thumbed Asterix comic or an order passed by a law Court, a Latin phrase is bound to pop-up; by the ill-fated Roman legionnaires and pirates in the former, by the learned judge in the latter.   

‘Pacta sunt servanda’ is one such Latin phrase meaning ‘agreements must be kept’.  It is said to have its origins in the 13^th Century, and is a principle of law that is possibly the most fundamental canon and backbone of international law.  As such it ought to be the keystone of treaty interpretation, a lighthouse to guide the general public relying on the treaty to structure their affairs.    

Tax treaties between India and other countries have been in play since before her gaining independence from Britain.  India has entered into comprehensive tax treaties with 94 countries / territories to help avoid double taxation.  But, in this article we discuss the totalization agreements that India has entered into with 18 countries so far, to avoid double coverage under a social security scheme.

Totalization agreement / Social security agreement (SSA)

Totalization agreements are meant to help the nationals of one country to remain covered in the social security schemes of their home country or to obtain / enhance benefits from coverage in the host country schemes. 

India has been a late entrant to the network of totalization agreements, with the first SSA between India and Belgium becoming effective only in September 2009, whereas some countries in the EU have had bilateral agreements in place since the late 1950’s; USA since the late 1970’s. 

As Indian citizens and employers have only recently begun using SSA’s, there are hardly any judicial rulings on interpretations of the SSA in relation to the Indian legislation on social security, viz. the Provident Fund Scheme. 

Domestic law versus treaty

In the context of tax treaties between India and other countries, the principle of Pacta sunt servanda has been endorsed by section 90(2) of the Income-tax Act, 1961, giving priority to mutually agreed treaty provisions over the domestic tax law, barring exceptions such as anti-avoidance rules.  Therefore, if there is a disadvantage caused by virtue of the domestic tax legislation, a qualifying taxpayer can choose to apply the treaty provisions instead.

However, there are no similar provisions in the domestic social security legislation (Employees’ Provident Funds and Miscellaneous Provisions Act or Schemes, 1952 or the PF Act), which provide guidance in matters where there is conflict between the SSA and the domestic PF law.   The SSA’s do provide that the competent authority specified in the SSA can settle disputes.  In India, this is the Employees’ Provident Fund Organization or the EPFO.  But, unless the PF Act itself specifies how the EPFO should deal with dichotomy between the SSA and the PF Act, the EPFO is more likely than not to decide such questions in favour of the PF Act, leaving in the lurch those employees and employers who have relied on the SSA on the assumption that the Indian competent authority would not have agreed terms in an international agreement without due diligence, i.e. after having considered the PF Act.   

Treaty interpretation vis-à-vis the Indian Constitution

Although India is neither a signatory to, nor has it ratified the Vienna Convention on the law of treaties, judicial rulings in India have ruled in favour of the Pacta sunt servanda principle in several cases. 

This principle of international treaty interpretation is contained in Article 26 of the Vienna Convention (reproduced below) and regulates the performance of agreements by contracting parties as agreed in the Treaty. 

“Article 26 - "PACTA SUNT SERVANDA" Every treaty in force is binding upon the parties to it and must be performed by them in good faith.”

Also, as stipulated in Article 27 of the Vienna Convention, a contracting party cannot use inconsistency between the treaty and internal law to justify the non-performance of an international treaty.

“Article 27 - INTERNAL LAW AND OBSERVANCE OF TREATIES A party may not invoke the provisions of its internal law as justification for its failure to perform a treaty.”

Putting these international principles of treaty interpretation in juxtaposition with the Indian Constitution, the Indian Parliament is conferred the power [Article 253] to make laws for implementing any treaty with another country or association. The State is also duty bound [Article 51(c)] to strive to respect international law and treaty obligations. 

While this ought to comfort the anxiety faced by impacted employees / employers in the context of a SSA, the absence of clear provisions in the PF Act can result in conflicted views and rulings on the applicability of treaty provisions.  This insecurity comes from the confusion caused by judicial rulings in India.  In the context of tax law, internationally accepted principles coded in the Vienna convention have sometimes been embraced wholeheartedly, at other times accepted only contextually and in several cases disregarded on the basis that India has not formally ratified the Vienna Convention.      

Copy and Paste lawmaking

It is likely that a larger set of employers and employees in India will rely on SSA’s, since India seems to be on the cusp of entering into a SSA with USA, a country with a significant number of migrant workers from India.  It is also an opportune moment to think about this lack of clarity in light of the proposed consolidated legislation on Social Security.  The Draft Code on Social Security, 2019 was introduced in the Lok Sabha by the Ministry for Labour and Employment in December 2019 and currently awaits a report by the Standing Committee in the Monsoon session of Parliament scheduled to begin by end-August 2020. 

The draft Code on Social security will eventually replace nine laws related to social security, including the current PF Act.  However, the provisions of the current PF Act are retained, as such, to a large extent in the draft Code and any gaps, such as the absence of clear provisions that identify how inconsistencies between the SSA and Indian law will be addressed, in the current PF Act will continue in the proposed new law, if the draft Code were to be enacted as such. 

Including sufficient clarity in the draft Code will go a long way in reducing the regulatory uncertainty businesses and employees will face, if caught between the SSA and the Indian social security legislation.

When business decisions cannot be made with confidence, the loss of faith does not just have real cost implications for the stakeholders.  It cripples investor confidence.  It is therefore important for any uncertainty in the legal interpretation of the SSA provisions in India to be resolved soonest.