Govt reduces rate of contribution towards ESI scheme, employers to benefit

Government decision may lead to annual savings to the tune of Rs 9,000 crore for the industry.

The government on Thursday announced reducing the total rate of contribution made by workers and employers towards the Employees’ State Insurance (ESI) scheme from 6.5 per cent to 4 per cent for the first time in over two decades.
 
The move is expected to benefit around 1.3 million employers who will see a 40 per cent reduction in the rate of contribution they make for their employees, in line with the provisions of the Employees’ State Insurance Act, 1948.
 
Nearly 4.75 per cent of a worker’s monthly salary goes towards ESI as the employer’s contribution, 1.75 per cent of the income is the employee’s share at present. Now, 3.25 per cent will be the employer’s share and 0.75 per cent the employee’s. This will be effective from July 1, 2019 — a move the government said “would benefit 36 million employees and 1.28 million employers”.
 
The move has the approval of Labour and Employment Minister Santosh Kumar Gangwar who had given his nod before he flew to Switzerland on Tuesday to attend the International Labour Conference. The Employees State Insurance Corporation (ESIC), which administers the ESI Act, had in February recommended decreasing the total rate of contribution of workers towards the insurance scheme from 6.5 per cent to 5 per cent. However, the labour and employment ministry went a step ahead to decrease the contribution rate to 4 per cent.
 

“The reduced rate of contribution will bring about a substantial relief to workers and it will facilitate further enrolment of workers under the ESI scheme and bring more and more workforce into the formal sector,” the government said in a statement, adding “Similarly, reduction in the share of contribution of employers will reduce the financial liability of the establishments leading to improved viability of these establishments.”
 
A top ESIC official said the move is expected to reduce the annual burden of over 1 million employers by Rs 8,000 crore-Rs 9000 crore. The ESIC received Rs 22,279 crore from employers towards the ESI scheme in 2018-19, the official added.
 
The ESI Act provides for medical, cash, maternity, disability and dependent benefits to employees drawing a salary of up to Rs 21,000 per month. The ESI Act applies to factories with 10 or more workers and it is also applicable to shops, hotels, restaurants, cinemas and road transport undertakings.
 
“From a business perspective, the contribution towards insurance and provident fund comes as a cost burden to companies. This will help firms to hire more workers through savings in the rate of contribution,” said the official cited above.