Proposal for Mandatory PF to workers with a salary of up to Rs 15,000 a month instead of Rs 6,500 at present

Employers may soon be required to make mandatory provident fund contributions to workers with a salary of up to Rs 15,000 a month instead of Rs 6,500 at present. Union labour minister Mallikarjun Kharge is likely to ratify a proposal to this effect on Saturday, when he presides over a meeting of the Employees’ Provident Organisation’s Central Board of Trustees.

While the move would inflate corporate India’s outgo on labour, lakhs of relatively low-income workers would benefit from the safety net they are being newly provided with. A negative fallout of the move could be that a sizeable section of the workforce could see a dip in their take-home salaries.

Both employers and employees make a contribution of 12% each to the Employees Provident Fund. Of course, for people with a higher income, the PF contribution by the employer is voluntary.

According to official sources, the proposal, mooted by the labour ministry, draws from a recommendation by the parliamentary standing committee on labour which had argued that the present wage ceiling had lost its relevance in view of the rapid transformation in the economy and the consequent rise in wages. The committee had pointed out that the other social security body under the labour ministry, the Employees’ State Insurance Corporation, had accepted the changes in the employment scenario and revised its wage ceiling from Rs 6,500 to Rs 10,000.

The government has been resisting a change to the ceiling as it was worried about adding to the liabilities of EPFO’s under-funded and badly designed employees’ pension scheme (EPS). In June 2001, the salary cap for mandatory EPF contributions was revised from Rs 5,000 a month to Rs 6,500 a month. But the EPFO later realised that the move had increased its obligations under the EPS by Rs 10,000 crore.

The parliamentary panel, however, wasn’t satisfied with the reasoning and asked the government ‘to come out of its slumber’ and increase the ceiling ‘without any delay.’ Accepting that the low ceiling meant a large chunk of the work force goes out of its purview and is left with no social security benefit, the EPFO has proposed that the pension scheme’s benefits be restricted to the extent of the existing ceiling of Rs 6,500.

The EPS was estimated to have a deficit of close to Rs 50,000 crore by last year and the labour ministry was compelled to cut its commutation benefits to complete another initiative aimed at expanding the EPFO’s coverage of the workforce — reducing the threshold for firms to come under the EPF from 20 employees to 10.

Taken together, the two moves — to raise the salary cap to Rs 15,000 and bring in firms employing over 10 workers — are expected to increase the number of workers under the EPF net significantly from the present 4.7 crore (a meagre 10% of the 40 crore plus workforce). While employment in the organized sector has been rising slowly due to contractualisation of the workforce, 95% of new jobs have been created in small and medium enterprises in recent years.

The EPFO’s coffers, which would swell to a mammoth Rs 3,60,000 crore by 2010-11, will swell even more. With over 90% of its money still going into government bonds, the expansion of EPFO’s coverage could become a convenient and captive deficit financing mechanism for the Centre.

Some experts, however, are concerned about the impact of the move on workers and their employers.

“It’s true that salaries have risen since 2001, but so have prices. Moreover, in the organised sector, all employers now treat provident fund contributions as part of the company’s total salary outflow for a worker on a Cost to Company basis. So if the mandatory PF contribution ceiling is raised to Rs 15,000, workers’ cash flows will be hit as their take home salaries will go down,” said Rahul Garg, executive director of PriceWaterhouseCoopers.

“It shouldn’t be that by mandating them to invest for their old age, workers are put in position where they find it difficult to make two ends meet. Given the inflation rate, we should be leaving more cash in workers’ hands,” Garg stressed.

Not only will workers’ take home salaries shrink, but employers will also have to pay much higher administration charges to the EPFO. At 1.1% of the salary, on which PF contributions are paid, companies will have to pay Rs 165 to the EPFO per subscriber per annum compared to the Rs 71 that they pay for a salary of Rs 6,500.

“Unless EPFO’s services also improve in sync with the higher charges it will collect, the move will only end up forcing more people to come under an inefficient system. If the government was funding the EPFO fully, there would not be a problem. But employees with such salaries should have the choice of where they invest their retirement savings,” said a pension consultant.