Column: Overcharging business, govt-style

By: and |
Published: December 30, 2015 12:19 AM

The govt has collected over Rs 7,800 crore in excess of its needs in 2014 as administration charges for EPF and ESI

The government has formulated various schemes like employees’ provident fund (EPF), employee pension scheme (EPS), employee deposit-linked insurance (EDLI), employee state insurance (ESI), etc, to address the question of providing for the medical care and for the future of employees after their retirement or for their dependents, in the event of their premature death.

Employers have to make the following payments, as a percentage of wages, over and above their contribution to Provident Fund and Pension Scheme:

* EPF administration charges of 0.85%, by non-exempt establishments and inspection charges of 0.18% by the exempted establishments, and
* 0.01% as EDLI administration expenses by covered establishments and 0.005% by exempted establishments.

A closer look at the income and expenditure account, as shown in the accompanying chart, in the last three years makes it very obvious that the government is charging excess amount to the employers and building unnecessary surpluses under various schemes, as the charge is to cover administration cost and not for creating surplus. It may be noted that the administration revenue and surplus under EPF schemes will increase further if the government implements a review committee’s decision to club all allowances of regular nature paid to employees with their basic pay.

In FY15 and FY16, the surplus is estimated at Rs 2,800 crore and Rs 3,000 crore.

Similarly, employers pay 0.5% of wages towards EDLI. The EDLI has generated revenue of Rs 698 crore in FY14 while the payments to beneficiaries are less than Rs 153 crore, thus generating a surplus of approximately Rs 540 crore. The EDLI corpus at the end of March 2014 was Rs 13,740 crore.

The transaction costs in the EPFO are very high as the organisation employs around 20,000 people. It can reduce its administration costs by outsourcing the work to NSDL as the I-T department had done. In the case of the ESI scheme, the government offers medical care to employees earning monthly wages up to R15,000. The employees contribute 1.75% and employers contribute 4.75% of wages. The ESI organisation has also built huge surpluses over the years. The income and expenditure account for the last three years is given in the accompanying chart.

The reserve fund of ESI was in excess of Rs 36,800 crore at the end of March 2014 (invested in bank deposits and government securities), of which non-earmarked /general and contingency reserve was over Rs 23,600 crore. With surplus estimated in FY15 and FY16 of Rs 6,500 crore and Rs 7,000 crore the total reserve fund is estimated at Rs 45,000 crore by FY16, an extremely high amount! The surplus fund is being used now to undertake large number of medical colleges and related projects at an estimated cost of about Rs 12,600 crore! Thus, it is wasting money on projects for which it does not have any mandate, just because it overcharges its stakeholders.

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The intent of the Act was not to accumulate surpluses on these items and if this was done by private sector it would be called profiteering.

While the government has reduced the EPF administration charges by 0.25%, w.e.f., January 1, 2015, there is a further scope to reduce the administration and inspection charges under EPF by at least another 25-30%, suspend EDLI charges for at least 10 years till it has utilised the corpus built so far and finally, reduce both employees’ and employers’ contribution under ESI to 1% and 2.5%, respectively. The recent decision of EPFO to increase the life insurance benefits to dependents to R6 lakh is a welcome one.

Overall, on both schemes, the government has collected, in excess of its needs, over Rs 7,800 crore in 2014. In FY16, it is estimated at R10,000 crore. It is necessary that the government reduces the cost to business by reducing the charges and saving business at least R10,000 crore per year. Further, instead of a mandatory ESI policy, the government should exempt the private sector organisations who offer medical insurance scheme to all its employees on terms which are equal to or better than ESI, a concept similar to the National Pension Scheme.

The authors are partners, Aarin Capital

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