Employee benefits have turned into taxes

The government should convert "taxes" into real benefits. It should also pay for them on behalf of those in the lowest rungs

One of the most debated aspects of the National Democratic Alliance (NDA) government’s performance score card has been the lack of employment generation. The government has pointed to the increasing number of subscribers in Employees’ Provident Fund Organisation (EPFO) as proof that increasing employment. Critics have hit back saying that this is only a portion of unorganised sector employees turning into organised sector employees. Moreover, increase in organised sector employment is inadequate to absorb the number of youths entering the labour market every year.

Why are employment opportunities are not keeping pace with the country’s GDP growth rate? One reason could be that cost-effective technologies are reducing the need for human employment. Another could well be the high “taxes” on organised-sector employment.

All the benefits extracted from employers—Employee State Insurance Scheme in 1948, EPF in 1952, Compulsory Bonus in 1965, Gratuity in 1972—were supposed to be over and above what the employer had contracted to pay. For example, if the employer had agreed to pay a salary of Rs 12,500 per month, he would have to pay the following “additional” contributions: Rs 563 for ESIC, Rs 1,500 for EPF, and Rs 521 each for gratuity and bonus, taking his total cost to Rs 15,600. The employee would need to make a matching contribution of Rs 1,500 to EPF and Rs 188 to ESIS. In states like Maharashtra, he would also pay a profession tax of Rs 200 per month (pm), thus reducing his take-home from Rs 12,500 to Rs 11,100. The difference between the cost to employer (Rs 15,600) and net in his hands (Rs 11,100) is a whopping 30 per cent.

In practice it is worse. Gradually all employers moved to cost-to-company basis. The ostensible salary is fixed at Rs 10,000 pm (instead of Rs 12,500) because the final cost to employer will then be Rs 12,500 pm that he has promised the employee. The employee’s take-home will be just Rs 8,900 pm. The attempt to extract benefits from the employer has ended up in these amounts being extracted from the employee and being paid to the government. These “benefits” affect the lowest-rung employees the most since they come with inbuilt caps that make them meaningless once salary increases. Some of these “benefits” such as ESIS premiums are actually “taxes” since employees are unable to access them easily. Profession tax is a tax anyway. Even EPFO’s services leave a lot to be desired as employees struggle to access their own monies from it. Low-paid employees are unable to fathom the advantages of future benefits when they are struggling to make ends meet. Many prefer to work on contractual basis to avoid the burden of these “benefits”. Replacing ESIS with the same contribution being allowed to be made to the Pradhan Mantri Jan Arogya Yojana (PMJAY) would turn it into a real benefit for the employee. For the lowest rung employees, the government could consider paying for benefits such as EPF, ESIS, etc. 

Converting “taxes” into “benefits” and paying for them for the lowest-rung employees will spur organised sector employment generation. 

The writer is a Sebi-registered investment advisor