Economic Survey 2016: Case made for optional EPF contribution for low earners

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New Delhi | February 27, 2016 12:54 AM

Contribution to the Employees’ Provident Fund (EPF) for those earning up to R15,000 per month should be made optional as it amounts to taxing them...

Contribution to the Employees’ Provident Fund (EPF) for those earning up to R15,000 per month should be made optional as it amounts to taxing them, the Economic Survey said. It also called for relaxing labour regulations to help generate more decent jobs in the formal sector. Removal of restrictive labour policies could arrest the shift in employment to the informal sector.

Apart from mandatorily paying 12% of their basic salary to the fund, most workers would prefer to receive cash, given a choice, because of liquidity constraints and higher transaction costs associated with withdrawing of EPF monies, it said. Employers, on the other hand, also need to deal with issues like high administrative costs and regulatory compliance.

“Policymakers should consider whether lower earners should be offered the same choice — of whether to contribute part of their salaries to the EPF — which the rich have. This would both introduce competition in the market for savings and allow the poor to optimise as per their personal requirements,” the Survey said.

“While mandatory for the poor, many rich people choose to contribute EPF as well, though it seems they do so primarily for tax reasons.” In many ways, it said, “the EPF is an example of subsidy for the rich as contributions, interest earned and withdrawals are all exempt from tax,” it added.

Meanwhile, the Survey also points out that to take advantage of the demographic dividend and meet the growing aspirations of those entering the workforce, the economy needs good jobs, mainly in the formal sector, that are safe, productive and well paying. Formal sector jobs also score better on non-pecuniary grounds.

However, there are two obstacles to formal sector jobs creation — regulation-induced taxes on formal workers and spatial mismatch between workers and jobs.

But the informal sector accounted for most employment growth between 1989 and 2010 and nearly all the increase in the number of establishments.

Underscoring the need for labour reforms, the economic survey said “regulatory cholesterol” has encouraged firms to rope in contract workers for ease of doing business, but they would prefer to hire regular staff for tomorrow’s benefit if dismal laws were different.

Call for relief
* Contribution to the EPF for those earning up to R15,000 a month should be made optional as it amounts to taxing them, the Survey said
* It also called for relaxing labour regulations to help generate more decent jobs in the formal sector
* Removal of restrictive labour policies could arrest the shift in employment to the informal sector
* The informal sector accounted for most employment growth between 1989 and 2010

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