Overcharging business, government-style

Updated: January 6, 2015 2:13:53 AM

Through the EPF and ESI schemes the government collected, in excess of its needs, over R6,500 crore in 2013

The government has formulated various schemes such as the Employee Provident Fund (EPF), Employee Pension Scheme (EPS), Employee Deposit Linked Insurance Scheme (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 dependants, 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 the EPF and EPS: (1) EPF administration charges of 1.1% by unexempted establishments and inspection charges of 0.18% by the exempted establishments, and (2) 0.01% as EDLI administration expenses by covered establishments and 0.005% by exempted establishments.

A closer look at the income and expenditure account (see table) in the last three years makes it 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.

Similarly, employers pay 0.5% of wages towards EDLI—it generated revenue of R620 crore in 2012-13 while the payments to beneficiaries are less than R125 crore, thus generating a surplus of approximately R500 crore. The EDLI corpus at the end of March 2013 was R12,090 crore. Using this, the government can easily increase the pay-out to beneficiaries from R1,30,000 to R5,00,000 per person.

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 the NSDL as the IT 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 the employers contribute 4.75% of wages. The ESI organisation has also built huge surpluses over the years. The table shows the income and expenditure account for the last three years.

The reserve fund of the ESI was in excess of R31,500 crore at the end of March 2013 (invested in bank deposits and government securities), of which non-earmarked and general and contingency reserve was over R15,600 crore. The surplus fund is being used now to undertake a large number of medical college and related projects at an estimated cost of about R10,000 crore! Thus, it is wasting money on projects for which it does not have any mandate, just because it overcharges its stakeholders.

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. It is recommended that the government should reduce the administration and inspection charges under the EPF by at least 50%, 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 the ESI to 1% and 2.5%, respectively.

Overall, on both the schemes the government has collected, in excess of its needs, over R6,500 crore in 2013. It is necessary that the government reduces the cost to the business by reducing the charges and saving business at least R6,500 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.

TV Mohandas Pai & Rajesh K Moorti

The authors are with Aarin Capital Partners

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