INDIA
09 September 2016
India-US Totalisation Pact
There is a need for an early conclusion to the India-US Totalisation Pact argue Mukul Asher and Amarendu Nandy.
The agenda for the second Indo-US Strategic and Commercial Dialogue, commencing on August 30, 2016 in New Delhi, suggests that though the focus of the discussions will primarily be on geo-political, geo-economic, and geo-strategic issues of mutual interest, India is also likely to strongly urge for an early conclusion of the Totalisation Pact or the Social Security Agreement (SSA) with the US. The SSA will help facilitate mutually beneficial bilateral flows of professionals between two countries. The current subdued global growth outlook (India however at around 7 percent in real terms is continuing to grow strongly) and strong convergence of strategic interests should act as motivating factors to complete the long drawn out negotiations for the SSA.
With regard to social security contributions and benefits, totalisation pact performs a role akin to double-taxation treaties in governing income tax arrangements internationally. The basic philosophy of such agreement is to ensure that cross-border workers do not end up paying social security taxes or contributions in more than one jurisdiction, or alternatively, avoid paying them in any jurisdiction, thereby constraining their retirement security. With populations living longer, cross-border flows increasing, and individuals having to bear greater share of their retirement needs, lack of SSA agreement could be detrimental to deeper bilateral economic engagement.
Most of these agreements are rooted in the principles of efficiency and equity in collection of contributions and disbursement of benefits for workers whose work-life is spent across various social security jurisdictions. Efficiency requires that social security taxes are levied in only one tax jurisdiction, preferably in the one that pays the benefits, thereby also making it internationally portable. This permits organizations employing them to better plan their costs, and facilitates retirement financing.
Equity is violated if a domestic worker, working in a foreign country, contributes social security taxes in the foreign jurisdiction, but neither qualifies for social security benefits in the foreign country, nor gets ack the contributions made to the foreign jurisdiction when returning home. Totalisation agreement could address such inequities.
Till date, India has signed 20 totalisation pacts, 16 of which are currently in force, with countries including Japan, Korea, Australia, France, Germany, and several Scandinavian countries. The US has signed totalisation pact with 24 countries till date, majority of which are with developed economies.
The talks on Totalisation Pact with the US, which commenced in 2008 did not register any progress until Prime Minister Modi and President Obama decided to restart the negotiations during President Obama’s visit to India in January 2015. The talks resumed in August last year, and have not been concluded yet. Such a delay is arguably escalating business costs of Indian companies operating in the US, as companies sending employees abroad typically agrees to absorb their social security tax payments and the associated taxes. By some estimates, the IT companies alone are paying around $1 billion a year to comply with social security norms in the US for their Indian employees deployed there. This, in turn, could impact the competitiveness of Indian businesses in the US vis-à-vis businesses from other countries which has inked a SSA with the US.
Without the totalisation agreement, India’s ‘international workers’ in the US are subject to inequitable treatment. While social security contributions and related taxes are mandatory for such workers, the benefits do not accrue to them when they return, as norms require that an international worker has to contribute for a minimum period of 10 years to qualify for social security and survivors’ benefits. The duration of stay of an Indian employee against non-immigrant visas like H-1 or L-1 ranges between 3-6 years, implying that they fail to meet the criterion. Neither social security benefits accrue to the employees, nor contributions made are recoverable, making it extremely inequitable for Indian employees deployed in the US.
The need for a bilateral totalisation agreement with the US assumes importance as India’s economic engagement with the US has been significantly deepened and widened under the current governments in both these countries. Apart from merchandise trade, trade in services and skilled migration have been the cornerstone of such closer engagement.
India-US total trade in goods and services reached US$ 100 billion in 2014, a four-fold rise from a decade earlier, and is targeted to grow to $500 billion in about a decade. US bilateral investment to India has grown from $8.5 billion in 2005 to over $35 billion in 2015. According to a 2015 report by the Confederation of Indian Industry (CII) and Grant Thornton (GT), India invested $15 billion across US, and created more than 91,000 jobs in the country.
In 2015, the United States emerged as India’s largest source of foreign tourists with more than 1.2 million American visitors, accounting for 15 percent of total foreign travellers. During the same period the United States received more than one million Indian visitors, who contributed nearly $11 billion to the American economy. US has been keen to attract Indians to avail of investment environment in US, including from its special visa regime (EB-5 immigrant visa) for those investing between $500,000 and $1 million in a U.S. business.
Such deep economic engagement will only increase two-way flow of workers, including natural persons (defined under Mode 4 of The General Agreement on Trade in Services), as Indian and US businesses establish commercial presence and other economic linkages in each other’s country. Over the past few years, Indians account for about three-fourths of US’ H-1B visas granted yearly. Notwithstanding the uncertainty of Presidential election outcome in the US and its potential impact on immigration policy, the two-way flow is likely to increase due to underlying economic dynamics.
This increases the urgency of concluding the totalisation agreement in a time-bound manner, as welfare losses from the absence of it is hard to justify from macro and micro perspectives.
One issue that is reportedly being raised by the US is the under-coverage of population (less than 50 percent) by mandatory pension schemes in India, a pre-requisite for concessions under totalisation pact with US. Given India’s economic and labour market structure, social security arrangements are fragmented. While the Employees’ Provident Fund Organization (EPFO) and National Pension System (NPS) are the main retirement organizations, PM Narendra Modi-led government has initiated many programmes which significantly extended social security, particularly healthcare coverage. Thus, Atal Pension Yojana (APY), an innovative mix of Defined Contribution (DC) and Defined Benefit (DB) pension scheme is available to all Indians on a universal basis. Steps are being taken to popularize the APY.
The Rashtriya Swasthya Suraksha Yojana, or National Health Protection Scheme (NHPS) provides for smartcard based cashless health insurance cover to below poverty line families, several occupational groups in the unorganized sector, and to workers who have worked for more than 15 days under MGNREGS (Mahatma Gandhi National Rural Employment Guarantee Scheme). Other schemes launched by the government such as Pradhan Mantri Jeevan Jyoti Bima Yojana, a government-backed life insurance scheme, and Pradhan Mantri Suraksha Bima Yojana, a government-backed accident insurance scheme indicates that extending social security coverage for a vast majority of the population is a priority.
There is a strong case for interpreting what is mandatory coverage of social security more liberally in the bilateral SSA agreement between India and the United States.
Early conclusion of SSA between the two countries would not only be in mutual interest, but would provide a strong positive signal to others in how to restructure bilateral partnership with dynamic emerging countries.
With regard to social security contributions and benefits, totalisation pact performs a role akin to double-taxation treaties in governing income tax arrangements internationally. The basic philosophy of such agreement is to ensure that cross-border workers do not end up paying social security taxes or contributions in more than one jurisdiction, or alternatively, avoid paying them in any jurisdiction, thereby constraining their retirement security. With populations living longer, cross-border flows increasing, and individuals having to bear greater share of their retirement needs, lack of SSA agreement could be detrimental to deeper bilateral economic engagement.
Most of these agreements are rooted in the principles of efficiency and equity in collection of contributions and disbursement of benefits for workers whose work-life is spent across various social security jurisdictions. Efficiency requires that social security taxes are levied in only one tax jurisdiction, preferably in the one that pays the benefits, thereby also making it internationally portable. This permits organizations employing them to better plan their costs, and facilitates retirement financing.
Equity is violated if a domestic worker, working in a foreign country, contributes social security taxes in the foreign jurisdiction, but neither qualifies for social security benefits in the foreign country, nor gets ack the contributions made to the foreign jurisdiction when returning home. Totalisation agreement could address such inequities.
Till date, India has signed 20 totalisation pacts, 16 of which are currently in force, with countries including Japan, Korea, Australia, France, Germany, and several Scandinavian countries. The US has signed totalisation pact with 24 countries till date, majority of which are with developed economies.
The talks on Totalisation Pact with the US, which commenced in 2008 did not register any progress until Prime Minister Modi and President Obama decided to restart the negotiations during President Obama’s visit to India in January 2015. The talks resumed in August last year, and have not been concluded yet. Such a delay is arguably escalating business costs of Indian companies operating in the US, as companies sending employees abroad typically agrees to absorb their social security tax payments and the associated taxes. By some estimates, the IT companies alone are paying around $1 billion a year to comply with social security norms in the US for their Indian employees deployed there. This, in turn, could impact the competitiveness of Indian businesses in the US vis-à-vis businesses from other countries which has inked a SSA with the US.
Without the totalisation agreement, India’s ‘international workers’ in the US are subject to inequitable treatment. While social security contributions and related taxes are mandatory for such workers, the benefits do not accrue to them when they return, as norms require that an international worker has to contribute for a minimum period of 10 years to qualify for social security and survivors’ benefits. The duration of stay of an Indian employee against non-immigrant visas like H-1 or L-1 ranges between 3-6 years, implying that they fail to meet the criterion. Neither social security benefits accrue to the employees, nor contributions made are recoverable, making it extremely inequitable for Indian employees deployed in the US.
The need for a bilateral totalisation agreement with the US assumes importance as India’s economic engagement with the US has been significantly deepened and widened under the current governments in both these countries. Apart from merchandise trade, trade in services and skilled migration have been the cornerstone of such closer engagement.
India-US total trade in goods and services reached US$ 100 billion in 2014, a four-fold rise from a decade earlier, and is targeted to grow to $500 billion in about a decade. US bilateral investment to India has grown from $8.5 billion in 2005 to over $35 billion in 2015. According to a 2015 report by the Confederation of Indian Industry (CII) and Grant Thornton (GT), India invested $15 billion across US, and created more than 91,000 jobs in the country.
In 2015, the United States emerged as India’s largest source of foreign tourists with more than 1.2 million American visitors, accounting for 15 percent of total foreign travellers. During the same period the United States received more than one million Indian visitors, who contributed nearly $11 billion to the American economy. US has been keen to attract Indians to avail of investment environment in US, including from its special visa regime (EB-5 immigrant visa) for those investing between $500,000 and $1 million in a U.S. business.
Such deep economic engagement will only increase two-way flow of workers, including natural persons (defined under Mode 4 of The General Agreement on Trade in Services), as Indian and US businesses establish commercial presence and other economic linkages in each other’s country. Over the past few years, Indians account for about three-fourths of US’ H-1B visas granted yearly. Notwithstanding the uncertainty of Presidential election outcome in the US and its potential impact on immigration policy, the two-way flow is likely to increase due to underlying economic dynamics.
This increases the urgency of concluding the totalisation agreement in a time-bound manner, as welfare losses from the absence of it is hard to justify from macro and micro perspectives.
One issue that is reportedly being raised by the US is the under-coverage of population (less than 50 percent) by mandatory pension schemes in India, a pre-requisite for concessions under totalisation pact with US. Given India’s economic and labour market structure, social security arrangements are fragmented. While the Employees’ Provident Fund Organization (EPFO) and National Pension System (NPS) are the main retirement organizations, PM Narendra Modi-led government has initiated many programmes which significantly extended social security, particularly healthcare coverage. Thus, Atal Pension Yojana (APY), an innovative mix of Defined Contribution (DC) and Defined Benefit (DB) pension scheme is available to all Indians on a universal basis. Steps are being taken to popularize the APY.
The Rashtriya Swasthya Suraksha Yojana, or National Health Protection Scheme (NHPS) provides for smartcard based cashless health insurance cover to below poverty line families, several occupational groups in the unorganized sector, and to workers who have worked for more than 15 days under MGNREGS (Mahatma Gandhi National Rural Employment Guarantee Scheme). Other schemes launched by the government such as Pradhan Mantri Jeevan Jyoti Bima Yojana, a government-backed life insurance scheme, and Pradhan Mantri Suraksha Bima Yojana, a government-backed accident insurance scheme indicates that extending social security coverage for a vast majority of the population is a priority.
There is a strong case for interpreting what is mandatory coverage of social security more liberally in the bilateral SSA agreement between India and the United States.
Early conclusion of SSA between the two countries would not only be in mutual interest, but would provide a strong positive signal to others in how to restructure bilateral partnership with dynamic emerging countries.