In the current economic landscape, the debate surrounding mandatory payroll deductions for low-wage employees has gained momentum. With a mandated 35% payroll deduction, the creation of formal jobs is significantly hindered. This rigid system forces employees to sacrifice a considerable portion of their salary, exacerbating poverty among the employed. As a result, low-wage workers find themselves trapped in a cycle of financial insecurity, where the benefits of formal employment are outweighed by the heavy deductions from their earnings. This situation calls for a re-evaluation of payroll policies to ensure they do not disproportionately burden those already struggling to make ends meet.

Balancing Contributions and Net Salary

In a Cost to Company (CTC) framework, mandatory contributions to the Employees’ Provident Fund Organisation (EPFO) reduce the net salary rather than the gross salary. While compulsory savings have their merits, enforcing contributions that greatly exceed the savings rate for the corresponding income bracket can drive informal employment. The EPFO currently holds a staggering ₹39,308 crore in dormant Provident Fund (PF) accounts. A PF account becomes inoperative if no deposits are made for three consecutive years, leading to potential penalties and a reactivation fee of ₹550. These mandatory deductions are especially burdensome for lower-income individuals who have minimal savings rates. Additionally, EPFO’s operating charges rank it among the world’s most expensive mutual funds. Employees should have the option to opt out of EPFO contributions and instead contribute to the National Pension Scheme (NPS), which new civil servants adopt. This flexibility would empower employees to make choices better aligned with their financial circumstances and goals, potentially improving their overall financial well-being.

Improving Health Insurance and Employee Welfare

A crucial aspect of social security is investing in the health and well-being of individuals. The Employees’ State Insurance Scheme (ESIS), however, has the worst health insurance claims ratio in India and provides subpar care despite sitting on ₹46,000 crore of idle financial investments. Employees should have the freedom to choose between paying their monthly health insurance premiums to the Employees’ State Insurance Corporation (ESIC) or purchasing a plan from any Insurance Regulatory and Development Authority (IRDA) health insurer. The insurance industry is capable and willing to create the necessary infrastructure to ensure seamless portability of these policies when employees switch jobs. This flexibility would empower employees to select insurance plans that best meet their needs and ensure access to quality healthcare, ultimately enhancing their overall well-being and financial security.

Enhancing Savings and Economic Growth

Household savings as a percentage of GDP plummeted to 12% in 2020-21 and further to 5% in 2022-23, marking a 47-year low. The decline in discretionary purchasing power stifles economic growth. Employees, often frustrated with organizational indifference, tend to abandon their hard-earned income. Making the Employee Provident Fund (EPF) contribution voluntary at 12% would narrow the gap between gross and net wages. This revision would grant individuals greater autonomy over their savings, investment, and returns, enhancing the accountability of organizations and schemes to their clientele. By allowing employees to choose how they manage their savings, this policy change could help restore household savings rates, boost economic growth, and foster a more responsible and responsive financial environment.

Adapting to Modern Employment Trends

In the rapidly evolving job market, the traditional benefits regime in India is due for a significant overhaul. The shift from lifetime employment to a gig economy necessitates a modern approach to employee benefits that aligns with the dynamic nature of today’s workforce. As more individuals hold multiple positions or engage in freelance and gig work, the current system of contributions and benefits tied to individual employers becomes increasingly outdated and inadequate.

One of the primary challenges in the current benefits regime is the lack of portability and traceability of contributions. Employees often find it difficult to transfer their benefits seamlessly when they switch jobs, leading to fragmented savings and benefits that are difficult to manage. To address this issue, it is essential to implement a system that facilitates the seamless transfer of benefits between jobs.

A promising solution to this problem is to link all Employees’ Provident Fund Organisation (EPFO) contributions to an Aadhaar number. By doing so, employees can ensure that their benefits are not tied to a specific employer but are instead linked to their unique identity. This change would create a unified and portable system, making it easier for employees to manage their benefits regardless of their employment status.

In addition to linking EPFO contributions to Aadhaar, uploading identity cards to DigiLocker would further enhance traceability and accessibility. DigiLocker, a digital storage platform provided by the Indian government, allows individuals to securely store and share their important documents. By integrating EPFO and Employee State Insurance (ESI) information with DigiLocker, employees can access their benefits and contributions with ease, promoting transparency and efficiency.

Furthermore, dropping individual EPFO and ESI numbers in favor of a unified system linked to Aadhaar would extend the benefits of these schemes to self-employed and gig workers. Currently, many self-employed individuals and gig workers are excluded from these benefits due to the rigid structure of the existing system. By creating a more inclusive and flexible benefits regime, India can ensure that all workers, regardless of their employment type, have access to essential social security benefits.

This proposed overhaul not only addresses the needs of the modern workforce but also fosters a more accountable and responsive benefits system. By enhancing traceability, portability, and accessibility, the reformed benefits regime would empower employees to take greater control over their savings, investments, and returns. This, in turn, would contribute to a more robust and resilient economy, as workers would be better equipped to manage their financial well-being.

Streamlining Identification Numbers

In India’s complex regulatory environment, employers are burdened with multiple identification numbers issued by central and state governments. This multiplicity not only reduces the ease of doing business but also complicates compliance processes, creating significant challenges for enterprises across the country. To address these issues, it is essential for the Employees’ Provident Fund Organisation (EPFO) and the Employees’ State Insurance (ESI) to drop their employee numbers and adopt the Goods and Services Tax Network (GSTN) as the universal enterprise number.

The introduction of a universal enterprise number would simplify the regulatory landscape for businesses, making it easier for employers to navigate compliance requirements. Currently, the issuance of multiple identification numbers leads to fragmented data and increased administrative burdens, hindering efficient business operations. By consolidating these numbers into a single, unified system, businesses can streamline their processes and focus on growth and productivity.

Adopting the GSTN as the universal enterprise number offers numerous advantages. Firstly, it enhances transparency and accountability by providing a comprehensive view of an enterprise’s activities. The GSTN, already in place for tax purposes, can be extended to cover EPFO and ESI contributions, creating a centralized database that facilitates better tracking and management of compliance obligations.

Moreover, the integration of all employer numbers into the GSTN would facilitate better triangulation of activities, health, and compliance. With a unified identification system, regulatory authorities can efficiently monitor and enforce compliance across various domains, including labor laws, tax regulations, and health and safety standards. This holistic approach ensures that businesses adhere to legal requirements while promoting fair and ethical practices.

For employers, the transition to a universal enterprise number would mean a significant reduction in administrative overheads. The consolidation of identification numbers simplifies reporting and documentation processes, allowing businesses to allocate resources more effectively. This streamlined approach not only improves operational efficiency but also reduces the risk of errors and non-compliance, ultimately benefiting both employers and employees.

Additionally, a universal enterprise number enhances the ease of doing business in India, attracting more investments and fostering economic growth. Simplified compliance processes make the Indian market more appealing to domestic and international investors, encouraging entrepreneurship and innovation. By reducing bureaucratic hurdles, the government can create a conducive environment for business development and job creation.

To implement this transition, it is crucial for the government to develop a comprehensive roadmap that includes stakeholder consultations, phased implementation, and robust support systems. Engaging with businesses, industry associations, and regulatory bodies ensures that the transition is smooth and addresses the concerns of all parties involved. Providing adequate training and resources to businesses during the transition period is essential for successful adoption and compliance.

Reducing Employed Poverty: Three Key Reforms

The mandatory payroll deduction regime in a CTC salary model is a major factor contributing to low productivity informal employment. Poor urbanization widens the gap between real wages (what employees care about) and nominal wages (what employers care about). Policy-induced discrepancies between gross and net take-home salaries further aggravate this issue. Without a significant increase in high-productivity formal employers, there will be no surge in high-wage employment. Reducing employed poverty requires three key reforms:

1. Making EPF contributions voluntary.
2. Allowing employees to choose their health insurance providers.
3. Streamlining employer identification numbers to improve business efficiency.

Implementing these reforms would not only alleviate employed poverty but also foster a more flexible, efficient, and employee-centric benefits regime.