Economy

EPF contribution cut: Labour Ministry notification adds twist to the tale

Anand Kalyanaraman BL Research Bureau | Updated on May 27, 2020

Representative image

Employers are required to make up for the shortfall to employees; so how indeed do they benefit?

Over the past week, BusinessLine highlighted through two articles (that were published on May 13 and May 18) the irony of how the EPF contribution rate cut measure (from 12 per cent to 10 per cent) will reduce the cost-to-company (CTC) that employers give their employees.

Also, we had said that employees, if they wish to, should be allowed to continue with their EPF contribution at 12 per cent.

Thankfully, the Centre seems to have taken note, and provided relief to employees. Employers will now have to make up the shortfall in their contribution to employees, thus maintaining the employees’ CTC. Employees can also opt to continue contributing at a higher rate. But in the bargain, employers will be left with no real benefit from the measure.

Ministry notification

The Ministry of Labour & Employment, on Tuesday evening, notified the reduction in the rate of contribution to the Employees’ Provident Fund (EPF) from 12 per cent to 10 per cent, as announced last week by the Finance Minister as part of an economic relief package.

 

This lower rate is applicable for the salary months of May, June and July 2020 to all establishments under the EPF & MP Act, 1952, except government employees and those covered under the Pradhan Mantri Garib Kalyan Package.

The notification says that the reduction in the rate of EPF contributions from 12 per cent to 10 per cent of basic wages and dearness allowances is intended to benefit both 4.3 crore employees/members and employers of 6.5 lakh establishments to tide over the immediate liquidity crisis (caused by Covid-19 issues) to some extent.

 

It adds that thanks to the lower rate, the employee shall have a higher take-home pay due to reduced deduction from his pay on account of EPF contributions, and the employer shall also have his liability reduced by 2 per cent of wages of his employees.

The notification explains this with an example. If ₹10,000 is the monthly EPF wages, only ₹1,000 instead of ₹1,200 will be deducted from the employee’s wages, and the employer will pay ₹1,000 instead of ₹1,200 towards EPF contributions (for three months).

Back to square one

But then, the notification adds a twist to the tale by implying that the employer will make up for the shortfall in EPF contribution to the employee. “In the cost-to-company (CTC) model, if ₹10,000 is the monthly EPF wages, the employee gets ₹200 more directly from the employer as the employer’s EPF/EPS contribution is reduced, and ₹200 less is deducted from his/her wages”.

But if this is indeed the case — of employers making up for their shortfall to employees — then how do employers benefit from their EPF contribution rate cut? In this scenario, an employer will be paying ₹200 less to an employee’s provident fund account, but will have to make up for this by paying ₹200 as other allowances, etc.

This will no doubt come as a relief to employees (since otherwise their CTC would have reduced). But employers will effectively be back to square one — what they gain in terms of lower cash outflows to the EPF, they will have to give back to employees in another form.

In such a case, the Centre should peg down — by half — the liquidity support amount of ₹6,750 crore that it said would accrue to employers and employees over three months as a result of the EPF contribution cut.

In any case, it should be noted that the Centre is not funding any part of this liquidity support. Had the Centre funded this measure, like it is doing in the case of establishments covered under the Pradhan Mantri Garib Kalyan Package, both employers and employees would have truly benefited.

Leeway to employees

Thankfully, the notification seems to be providing some leeway to employees who want to continue with their contribution of 12 per cent (instead of 10 per cent). It says that under the EPF Scheme, 1952, any member has the option to contribute at a rate higher than the statutory rate (10 per cent). But the notification adds that an employer can restrict his contribution to 10 per cent (statutory rate) in respect of such employees.

Published on May 20, 2020

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