Clubbing of wages for PF to dampen investment sentiment: Ficci

Clubbing of wages for PF to dampen investment sentiment: Ficci

Industry body Ficci on Tuesday opposed any move to club allowances with the basic wages for PF deductions stating besides increasing financial burden on it and government, it will "dampen" investment sentiments.

"The proposal to renotify definition of 'basic wages' under the Employees Provident Fund & Miscellaneous Provisions Act 1952, has huge financial implications both for industry and the government", the industry body said in a statement.

"The move is ill-conceived and if brought into force will dampen business and investment sentiments," it said. "This may even be counterproductive to the Employees' Provident Fund Organization (EPFO) as organizations who are extending coverage to employees receiving salaries above Rs 6,500 may choose to opt out, depriving employees coverage under a globally renowned social security scheme," Ficci said.

According to the provisions of EPF scheme 1952, every employer has to contribute 12 percent of the basic pay and dearness allowance towards the PF deposits of workers every month. Thus with increase in basic wages, the employers' liability would increase.

Out of employers' 12 percent contribution, 8.33 percent is deposited into workers' Employees' Pension Scheme 1995 accounts.

Central Government also contributes 1.16 percent of the basic wages of workers toward their pension account. Therefore, the decision would also result in higher contribution by the central government towards workers' pension accounts.

At present, there are over 50 million subscribers of the scheme. EPFO has a corpus of over Rs 5 lakh crores in EPF and EPS schemes. As per the notification issued by the EPFO on November 30 last year, all allowance which are 'Ordinarily, Necessarily and Uniformly' paid to workers were to be clubbed with basic wages for the purpose of PF deductions.

However, the notification was put on hold later on. EPFO had constituted a committee comprising unionist and employers to deliberate on the issue. The panel had reportedly suggested allowing clubbing of wages with minor changes in the provisions to Labour Ministry. The final decision to notify the clubbing of wages, has not taken so far by the ministry.

The body feels that the introduction of a triple test-'Ordinarily, Necessarily and Uniformly'- for the purposes of defining basic wages will arm the field staff to use their discretion to put additional burden on employers.

EPFO bid to rejig Provident Fund may hit finance ministry wall

The Employees Provident Fund Organisation's (EPFO) proposal to club allowances with basic salary to calculate provident fund contribution could face a finance ministry roadblock. 

While clubbing various allowances can more than double the basic pay for a large section of employees, it will also increase the budgetary provisions for the EPF pension component to over R2,800 crore annually from R1,400 crore last fiscal, a labour ministry official told FE. 

At present, employees contribute 12% of their basic salary to the EPF, while the employer contribute 3.67% to EPF, 8.33% to employees pension scheme (EPS) and 0.5% to employees deposit link insurance scheme (EDLI). The government contributes 1.16% of the employee's basic salary to the EPS scheme. 
The finance ministry, which has not yet cleared a proposal of raising the minimum pension to R1,000 a month from the present R540 on the anticipation of an extra burden of R600 crore, is in no mood to approve the demand for re-defining compensation in this context to include all allowances apart from basic salary, which would raise its pension liability, even as the rate of contribution remains the same. 

The hike in basic salary may also not bode well with the EPFO as its pension liability will increase at a time when EPS scheme stares at a actuarial deficit of over R50,000 crore.

What the labour and finance ministries could agree to is to allow deduction of PF on the full compensation up to the minimum wage limit of R3,500 a month, without any splitting. This could result in a small increase in government pension liability, the official said. This will prevent companies from splitting minimum wages for evading PF payment. To curb firms from splitting wages into a multitude of allowances and commissions to evade PF contribution, the EPFO issued a circular last year that stipulated clubbing allowances paid "ordinarily, necessarily and uniformly" with the basic salary for calculating the provident fund contribution. But it created a furore as it implied a substantial reduction in take-home salary albeit the PF contribution would have gone up and the labour ministry later had to put the circular in abeyance. The ministry constituted a committee comprising EPFO officials, representative from trade unions and employers association to resolve the matter. The committee's report, which favoured the clubbing of allowances, was recently sent to the labour ministry for final vetting, sources said. 

Industry lobbies CII and FICCI have opposed the move as the rule change could raise the financial burden for the government and private companies. A hike in basic salary means the employers' contribution to EPF also goes up. Since, many companies are wary of changing the cost to the company (CTC), for the employees, the take-home amounts could come down. In case of public sector, the hike in basic salary means extra contribution from the employer -- which is either government or a PSU. 

"Organizations that are extending EPF coverage to employees receiving salaries above the mandatory EPF threshold of R 6,500 may choose to opt out, depriving the employees coverage under a globally renowned social security scheme. Most of the employees today join an organization above this statutory limit and they are voluntarily covered by the industry," said Ficci president Naina Lal Kidwai. 

While admitting the financial implication, All India Trade Union Congress national secretary DL Sachdev said the original demand was to amend the Unorganised Sector Workers Social Security Act to prevent splitting of minimum wages and paying PF on the entire minimum wages. Even that has been pending with the finance ministry, along with the proposal to raise the limit of basic salary to R15,000 from R6,500 for mandatory EPF coverage. 

A sudden jump in salary cost would only crimp the profit margin of India Inc ,already reeling under the worst slowdown in a decade. A lower take-home salary will also slash consumer demand and delay an early industrial recovery.