India – Government Reduces The Rate Of Employees State Insurance (ESI) Contribution

INTRODUCTION

 

Under the Employees’ State Insurance Act, 1946 (the “ESI Act”), the contribution, at a specified rate, payable to the ESI Corporation in respect of an employee comprises both the employer’s and employee’s contributions. The rates are revised from time to time. Prior to the amendment, the contribution rate (with effect from January 1, 1997) was 1.75% and 4.75% of the wages, by an employee and employer, respectively.

 

The Government of India, after consultation with the ESI Corporation, vide notification dated February 15, 2019 had proposed amendments in the current rate of contribution and had sought objections and suggestions to the same. After considering the objections and suggestions received from the public, the Government of India has now made amendments to the current rate of contribution.

 

AMENDMENT TO RATE OF CONTRIBUTION

 

The Government of India, vide notification dated June 13, 2019, has reduced the total rate of contribution under the ESI Act from 6.5% to 4%. The employer’s contribution has been reduced from 4.75% to 3.25% and employee’s contribution reduced from 1.75% to 0.75% of the wages. The reduced rates will be effective from July 01, 2019.

 

As per the statistics of the Government, reduction of the contribution rate will benefit 36,000,000 employees and 1,285,000 employers.

 

As per the Government announcement, the reduced rate of contribution will bring about a substantial relief to workers and it will facilitate further enrolment of workers under the ESI scheme and bring more and more workforce into the formal sector. Similarly, reduction in the share of contribution of employers will reduce the financial liability of the establishments leading to improved viability of these establishments. This shall also lead to enhanced Ease of Doing Business. It is also expected that reduction in rate of ESI contribution shall lead to improved compliance of law.

 

INDUSLAW VIEW

 

The ESI Act applies to establishments which have 10 or more employees drawing a salary of up to INR 21,000 per month (approximately USD 300). The scheme, which is governed by the State administered ESI Corporation provides for medical, cash, maternity, disability and dependent benefits to the insured.

 

This move of the Government will help in formalizing the informal workforce and extend social security benefits to a larger part of the workforce.