EPFO - Eases of doing of business.

Last Saturday, the Employee Provident Fund organization (EPFO) eased the burden of employers by reducing, or I would say rightsizing the rate of penalty, on default of payment of contributions with a retirement fund management body. The contributions made to the employee provident fund (EPF), employee pension scheme (EPS) and employee deposit linked insurance (EDLI) made in a delayed manner by employers would be liable to pay only 1 percent of the contributing amount per month as penal charges for these three schemes. 

This translates into 12 percent of the contributions per annum. Previously, a penal charge of 5 percent per annum was levied for less than two months of default, while a charge of 10 percent per annum was imposed for defaults for a period of two to four months.

Later, the penalty was increased to 15 percent per annum for defaults for four to six months and could go as high as 25 percent per annum if the default continued for more than six months. From this, it looks like there is no significant ease for defaulters of less than 4 months. This will reduce penal liability for employers if they default for a longer period. In economic terms, it's another way of incentivizing long-period defaulters.  As the very famous Bollywood movie saying goes like ‘ek khoon ki saza faasi, 100 khoon ko sazaa bhi faasi’ i.e. the punishment for one murder is death. The punishment for 100 murders is also death. There would be chances willful defaulters may land up favoring long period defaults. Well, that’s one of a worst-case scenario.

In month of March (24) EPFO warned employers about defaults and penalties as part of their outreach to the mass via Twitter. Penalties for different duration of defaults attract different rates of penalties. In the last three months, things have changed a lot, India is marching towards its dream of becoming a developed country by 2047. Ease of doing business is one of the steps to attain this vision of a developed country. Willful defaulters are not outnumbered, labor and litigation mechanism need to be stronger than before to tackle them with firm hands. I am sure retirement fund management body have some mechanism to deal with them. However, this relaxation in penalties on default cases will provide a window of opportunity to MSME, startups who are facing financial difficulties. 

Creating a value for shareholders for sustainable growth may lead to sustainable growth for people working within the corporation. Any sustainable business is creating an ecosystem or value chain to nurture the surroundings. That ecosystem provides ample employment opportunities for young people. 

That ecosystem needs to be eased in order to rip out the benefits of its growth. Unreasonable penal provision could lead to everlasting detrimental effects on businesses. Entrepreneurs have to  align their current financial resources to fulfill their immediate pressing needs. Sometimes, fluctuations in the business cycle may lead to temporary turbulence. Modern day entrepreneurs need to ring-fence their social security obligations to protect their human potential.

The latest movement by EPFO is not a big step but one of the steps to ease of doing business.

- Amol Nakve 

(Views expressed in this article are personal)