US Secretary of State John Kerry and Secretary of Commerce Penny Pritzker will be visiting India on August 30 for the crucial strategic and commercial dialogue trade. With many things on the agenda, the talk will also include totalization agreement, which, if agreed upon, will be comforting for the Indian tech community in the US. But, first, what is this totalization agreement?
Imagine you pay a fixed percentage of your salary for a certain privilege without ever getting its benefits. It will hurt bad, really bad! Indian guest workers in the US, a majority working in tech companies, pay social security taxes, equivalent to the Indian provident fund, without any benefits. Totalization agreement is your answer to solve this expensive problem.
Under the current setting, an employed Indian worker in the US whose payroll is in India has to pay the provident fund in India. In addition to this, he has to pay towards social security in the US. To reap the benefits of social security, the worker has to stay for at least 10 years, or 40 quarters in the US. However, visas are issued for a maximum of six years and most of the workers come back to India once their overseas assignment is over. The result? Indians contribute a fixed 6.2 percent of the salary as social security to the US government which cannot be repatriated.
Why is this a big deal?
India sends the highest number of temporary workers to the US, who mostly work for tech companies. Nasscom estimates that Indians working through H-1B and L-1 visas contribute almost $1 billion annually to the US. Similarly, Americans living in India face similar problems; however, this number is much smaller than Indians going abroad. The rules for withdrawal of provident funds are the same as it is for Indians.
Currently, India has signed the totalization agreement with 18 countries, of which agreements with 13 countries have been enforced, such as Belgium, Germany, and Switzerland. On the other hand, the US has signed this agreement with 25 countries, such as Australia, Japan, and South Korea.
What will happen if the agreement is signed?
According to Internal Revenue Service, which is the revenue service of the US federal government, "Teachers, trainees, and researchers in H-1b status, and alien nurses in H-1a or H-1c status, are liable for Social Security/Medicare taxes from the very first day of U.S. employment, regardless of whether they are nonresident or resident aliens, and regardless of whether their wages may or may not be exempt from federal income taxes under an income tax treaty, unless the provisions of a Totalization Agreement relieve such aliens from liability for U.S. Social Security/Medicare taxes."
If the agreement is signed, Indians will be privy to certain benefits. Indians will not be paying for social security and will be contributing to the Indian provident funds, provided they show a certificate of coverage. Also, contributions in the US may get repatriated to the provident fund in India.
However, even if the totalization agreement sees daylight, it may not benefit all the workers in the US, says Rajiv Dabhadkar, founder of The National Organisation for Software and Technology Professionals, which works for Indian workers overseas.
“All content of the totalization agreement speaks in favour of employees of Indian companies deputed to the US; however, it ignores Indian citizens working independently for American firms and those not tied to their Indian companies in India,” he said. “This is highly Indian employer centric and eliminates fresh-off-the-boat guest workers or fresh-off-campus recent graduates of Indian origin who do not have an active provident fund account in India.”
What is holding the agreement?
The topic has been up for talks for almost a decade now, with almost five rounds of discussions, but no concrete solution has come out of it.
In April this year, Indian Finance Minister Arun Jaitley highlighted the importance of an early conclusion of the totalization agreement during a bilateral meeting with US Trade Representative Ambassador Michael Froman.
Poorvi Chothani, managing partner of LawQuest, a global immigration law firm headquartered in Mumbai, believes that the lack of political will is holding back the signing of the agreement.
“Whenever we start negotiating with the US a lot of things come into the picture. Discussions get derailed, and bureaucrats and politicians try to resolve many things together, many of which are 'more important' in the larger picture of things. But there’s not enough political will to get the equalization agreement going; if there is political will and commitment, it can be negotiated and signed in a matter of few days,” she said.