Ease of doing business? Mandatory EPFO, ESIC registrations may enhance compliance for MSMEs, startups

Published: March 9, 2020 12:10:10 PM

Ease of Doing Business for MSMEs: With the introduction of SPICe+, registrations for EPFO and ESIC shall be mandatory for all new companies incorporated with effect from February 23, 2020.

epfo, esci, provident fund, spice+Prior to the introduction of SPICe+, an applicant had an option to apply for GST, ESI, and EPF registrations
  • By Manishii Pathak

Ease of Doing Business for MSMEs: The Ministry of Corporate Affairs (‘MCA’) has notified a new web form ‘SPICe+’ (Simplified Proforma for Incorporating Company Electronically Plus: INC-32), replacing the existing SPICe form. SPICe+ would offer 10 services by 3 Central Government Ministries (the MCA, the Ministry of Labour & Department of Revenue in the Ministry of Finance and one State Government of Maharashtra) for starting a business in India. SPICe+ form would be applicable for all new company incorporations. This move by the MCA is part of the Central Government’s ‘Ease of Doing Business’ initiatives. In order to incorporate the aforesaid changes, MCA has notified the Companies (Incorporation) Amendment Rules, 2020 effective from February 23, 2020.

Significant Features of SPICe+

SPICe+ would have two parts. Part A will be for name reservation for new companies and Part B will offer a bouquet of services viz.

  • Incorporation;
  • DIN (Director Identification Number) allotment;
  • Mandatory issue of PAN (Permanent Account Number)3;
  • Mandatory issue of TAN (Tax Deduction and Collection Account Number)4;
  • Mandatory issue of EPFO (Employees’ Provident Fund Organisation) registration;
  • Mandatory issue of ESIC (Employees State Insurance Corporation) registration;
  • Mandatory issue of Profession Tax registration (Maharashtra);
  • Mandatory opening of bank account; and
  • Allotment of GSTIN (Goods and Services Tax Identification Number), if so applied for

Prior to the introduction of SPICe+, at the time of incorporation of a company, an applicant had an option to apply for Goods and Services Tax (GST) registration, Employees State Insurance (ESI) registration and Employees’ Provident Fund (EPF) registration along with the company registration in SPICe form. However, taking all the said registrations was not mandatory for a company at the time of incorporation.

With the introduction of SPICe+, registrations for EPFO and ESIC shall be mandatory for all new companies incorporated with effect from February 23, 2020, and no EPFO and ESIC registrations shall be separately issued by the respective agencies. Though it is optional to apply for GSTIN, applying for registrations with EPFO and ESIC, profession tax registration (currently provided for the state of Maharashtra, India) and opening of a bank account are mandatory at the time of incorporating a new company.

Also read: Govt bets more on small businesses for defence production; number of MSMEs increases 21 per cent

Impact of Changes

At present, registrations under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (‘EPF Act’) and the Employees’ State Insurance Act, 1948 (‘ESI Act’) are mandatory for companies which employ more than twenty and ten employees, respectively. Also, companies which do not have the aforesaid minimum threshold(s) of employees can voluntarily opt to register under the EPF2 Act and the ESI Act. While the aforesaid development is brought with the prospects of making the incorporation procedure simple, fast and cost-effective, the requirement of mandatory registration(s) under the EPF Act and the ESI Act is bound to lead to confusion among the companies as well as the officials of EPFO and ESIC. Introduction of SPICe+ would also require a statutory change/amendment of the EPF Act and the ESI Act.

For companies having less than twenty or ten employees, especially startups, micro and small enterprises, etc., mandatory registration(s) under the EPF Act and the ESI Act could result in companies having to undertake all the relevant compliances as provided under the EPF Act and the ESI Act, such as filing of appropriate periodical returns, as provided under the relevant statutes.

Conclusion

Changes brought through SPICe+ may increase the compliance burden on startups, micro and small enterprises. Mandatory registration(s) and compliance(s) under the EPF Act and the ESI Act could increase the burden of compliances (even when the employee strength is below the threshold) for businesses of such startups, micro and small enterprises, as non-compliances of the same could lead to penalties under the said Acts. This step would also result in an increased financial burden on companies.

It would be better if the Central Government provides a clarification that even if a registration (under the EPF Act and the ESI Act) is granted to a company, such a company would not need to undertake any filing(s) with the concerned EPFO and ESIC unless such a company reaches the minimum threshold limit. Another option could be to provide an undertaking, until a company reaches the minimum threshold of employees, in the annual return filed by a company with the MCA, that either or both the Acts are not applicable.

Manishii Pathak is the Partner at IndusLaw. Views expressed are the author’s own.

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