Usher in competition between EPF and NPS to boost formal job creation

The government needs to introduce competition between EPFO and NPS, and between ESIC and health insurance companies, while making contributions voluntary for low-paid workers

Let’s begin with my favourite episode from the 1980s British satire series Yes Minister, featuring senior bureaucrat Sir Humphrey and his boss, Cabinet minister Jim Hacker. In a famous scene, Sir Humphrey justifies the existence of a 

hospital with no patients but 500 administrative staff:
 

Jim Hacker: “A hospital without patients? What’s the point of that?”
 

Sir Humphrey: “It’s a perfectly good hospital, Minister. It has excellent administration and an efficient staff.”
 

Jim Hacker: “But no patients!”
 

Sir Humphrey: “Patients are an unnecessary inconvenience for the staff.”
 

Jim Hacker: “Isn’t the purpose of a hospital to have patients?”
 

Sir Humphrey: “Oh no, Minister. The purpose of the health service is to provide health care, not health.”
 

This dialogue perfectly satirises the absurdity of outdated systems, reminding me of rules in our formal sector, framed in the 1950s. These rules on Employee Provident Fund (EPF), Employees State Insurance (ESI) and Profession tax burden employers and employees alike, especially as we struggle to increase formal employment.
 

Take the example of Sarita, a (fictitious) new employee in Mumbai earning Rs 15,000 per month (Rs 1.80 lakh annually). She must pay a profession tax of Rs 2,500 annually. The administrative burden of paying this tax is high. With no time limit for arrears collection, notices can arrive 10-15 years later, with steep penalties.
 

Next, Sarita (Rs 1,350) and her employer (Rs 5,850) must pay a total of Rs 7,200 annually to the Employees’ State Insurance Corporation (ESIC). However, getting claims from ESIC is notoriously difficult, effectively making it another tax. ESIC holds Rs 1,17,000 crore in reserves. The claims paid (Rs 14,000 crore) are 83 per cent of contributions (Rs 17,000 crore), and investment income (Rs 7,000 crore) is 41 per cent of contributions (Source: Accounts for year ended March 31, 2023). The numbers reveal a system where contributors have long given up hope of receiving claims.
 

Then you have the Employees’ Provident Fund Organisation (EPFO) triplets. Sarita contributes Rs 1,800 monthly to her EPF, while her employer contributes Rs 600 to her account, plus Rs 75 in administrative charges. In addition, her employer contributes Rs 1,200 to her Employees’ Pension Scheme (EPS) account and Rs 900 for her life insurance (of Rs 7 lakh), under the Employees’ Deposit Linked Insurance (EDLI) scheme.
 

All these small deductions add up. Sarita pays Rs 25,450 per year (Rs 21,600 EPF + Rs 2,500 profession tax + Rs 1,350 ESIC), leaving her with Rs 1,54,550 from her salary of Rs 1,80,000. Meanwhile, her employer pays a total of Rs 39,250 (Rs 7,200 EPF, Rs 24,400 EPS, Rs 900 EDLI, Rs 900 administrative charges and Rs 5,850 ESI), making Sarita’s total cost to the employer Rs 2,19,250. The difference (Rs 64,700) between her employer’s cost and Sarita’s take-home pay is 42 per cent—coincidentally the same tax rate for individuals earning over Rs 5 crore annually. Effectively, the lowest-paid employees are taxed at the same rate as the highest earners.
 

The benefits are illusory. After March 31, 2023, subscribers withdrawing money from EPF do so based on estimated earnings. EPFO has 5 lakh dormant accounts, and its infrastructure is crumbling, leading to delayed payments, according to reports. EPF must be the highest-cost fund manager globally, with zero accountability. Its pension scheme, according to the last valuation in 2019, revealed a Rs 37,000 crore deficit, which has likely grown since. Any deficit in the EDLI scheme remains undisclosed in the annual accounts.
 

Former finance minister Arun Jaitley remarked in his 2015-16 Budget speech, “Both EPF and ESI have hostages, rather than clients. Further, the low-paid worker suffers deductions greater than the better-paid workers, in percentage terms.” Yet, EPFO has stonewalled the interoperability between the National Pension System (NPS) and EPF for the past nine years.
 

Truth be told, the government must stop listening to the Indian Sir Humphreys advocating for the status quo at EPFO and ESIC. To create formal jobs, competition needs to be introduced for both EPFO (with NPS) and ESIC (with health insurance companies). Contributions should also be voluntary for low-paid workers. We need to stop levying a 42 per cent “tax” on our lowest-paid employees.

The writer heads Fee-Only Investment Advisors LLP, a Sebi-registered investment advisor; X (formerly Twitter): @harshroongta