PF ceiling hike set to hit small businesses hard

Already hit hard by slowdown and tight liquidity, small and medium enterprises face a new problem — finding funds for an expanded provident fund coverage.

From October 15, companies will have to step up their contributions to the Employees’ Provident Fund Organisation (EPFO). A new directive, which took effect on September 1, raises the basic salary limit for PF enrolment to ₹15,000 from ₹6,500, bringing many new employees under the EPFO umbrella. Companies have to contribute 12 per cent of every enrolled employee’s basic salary towards PF, of which 8.33 per cent goes into a pension scheme.

The expanded coverage will lead to a spike in wage costs for companies. According to an EPFO circular, companies in sectors such as building and construction, placement agencies, mines, banks, and healthcare are likely to see a large impact.

The sudden change, half-way between annual pay raise cycles that happen in April, can push up the wage bill by 2-3 per cent for small companies, says R. Venkatakrishnan, Treasurer, TiE Chennai, an organisation that promotes entrepreneurship.

“With a net profit margin of 8 per cent, they will see a big hit to their profitability,” he says. “Raising the ceiling in a phased manner would have given companies sufficient runway to adjust their pay structure,” he feels.

Arranging the additional cash at short notice is a problem, says V Nagappan, Director, Tamil Nadu Newsprint and Papers. Given the downturn, smaller companies are already facing liquidity problems.

Companies have little leeway in making payments. “Contributions must be deposited by the 15th of the following month, plus a five-day grace period,” says Amarpal Chadha, Tax Partner, EY.

Delays attract interest and penalties.

Some companies are, however, not troubled as they are voluntarily making such payments already. Take the case of RuralShores, a BPO that operates in the rural segments. Around 18 per cent of its employees will be affected by the change, but there will be no financial impact as “all of them have been covered under the PF regime regardless of their salaries,” says Murali Vullaganti, CEO, RuralShores.

While the steep hike is tough for companies, especially small and medium enterprises, it was long overdue. The eighth revision since the wage ceiling was first set in 1952, comes after the cap was last raised in 2001 from ₹5,000 to ₹6,500.

According to an EPFO estimate, the latest change will increase the number of employees covered under the provident fund scheme by 30 per cent. The total EPFO membership was 89 million as of March 2013.

In 2012-13, nearly 7.4 lakh establishments contributed to the EPF scheme, which had a corpus of ₹1.8 lakh crore (as of March 2013). Payments for monthly pensions and withdrawal benefits amounted to ₹ 9,038 crore.

Though the raising of the cap is seen as good news by most employees in the organised sector who have no formal retirement or pension scheme, the younger generation is none too happy.

Preferring more money on hand now, rather than salt away for a distant future, “the PF deduction has resulted in discontent amongst many employees,” says Vullaganti whose company has a young workforce.

There may be more cause for unhappiness in the future too. Companies may also skimp on increments for the next one-two years, citing higher PF/pension contribution, according to Nagappan.

Will companies move to hiring people on a contract basis to reduce the pension contribution? Not likely, says Chadha. For, strictly speaking, the current PF rules cover contract employees also.