Budget 2018: Right from whether a worker has a formal contract to whether he is under the social security net, formality is defined in many ways in India in the absence of a clear-cut demarcation.
Budget 2018: Whether adequate new jobs are being created or not is contentious, the Survey said 12.7 crore or 53% of India’s 24 crore non-agricultural workforce belongs to the formal sector. “India’s formal sector, especially formal non-farm payroll, is substantially greater than what it currently is believed to be. It became evident that when “formality” was defined in terms of social security provisions like EPFO/ESIC the formal sector payroll was found to be about 31% of the non-agricultural workforce. When “formality” was defined in terms of being part of the GST net, such formal sector payroll share was found to be 53%,” it said. Right from whether a worker has a formal contract to whether he is under the social security net, formality is defined in many ways in India in the absence of a clear-cut demarcation. In its 68th round of survey, carried out in 2011, the National Sample Survey Organisation had pegged the country’s non-agricultural workforce at 24 crore. Deriving the definition of formality for employees who are part of the firms paying taxes under the Goods and Services Tax (GST), the Survey arrived at the number of formal employment at 11.2 crore and added the regular government employees of 1.5 crore to arrive at the number.
It could have gone up even further had it added defence personnel to the number. However, the Survey puts a cautionary note on the numbers derived from the GST registration, saying, “not all the firms that pay GST are formal, in the common-use sense of the term” since many small, below-the-threshold (Rs 20 lakh) firms have registered for the GST so that they can secure tax credits on their purchases. At the same time, the derived figure excludes many formal workers in sectors outside the GST such as health and education. Meanwhile, the number of formal sector payroll, however, would be less at 7.5 crore, including government workers, if “formality” would mean and limited to those workers who are under social security provisions like Employees’ Provident Fund Organisation (EPFO) or Employees’ State Insurance Corporation (ESIC). This would then mean that the about 31% of the non-agricultural workforce are in the formal sector.
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Currently, the EPFO has an active subscriber base of over 4.5 crore, a little over 3 crore employees are covered under the ESIC scheme. Under the EPF Act, 1952, an EPF account is mandatory for all employees earning up to Rs 15,000 per month in firms employing more than 20 workers. Above the threshold, contributions are voluntary.
For ESIC, the eligibility threshold was raised last year to a maximum monthly income of Rs 21,000 per month from Rs 15,000 earlier. Although there are proposals to lower the employee threshold for EPF cover from 20 now and raise the wage ceiling for mandatory EPF to Rs 21,000 per month from Rs 15,000, these are yet to be implemented.
The survey also found that of the 712.9 lakh firms, just about 0.6% firms accounting for 38% of the total turnover and bearing 63% of the GST liability are what might be called in the “hard core” formal sector in the sense of being both in the tax and social security net. At the other end, 87% of the firms, representing 21% of the total turnover, are purely informal, outside of both the tax and social security nets. Around 12% of the firms are in the tax net, but not on the social security net and the remaining 0.1% are in the social security net, but not in the GST net.