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Government Reduces ESI Contribution Rate To 4%, Industry To Save Rs 5,000 Crore Annually

The Union government has cut contributions made by employers and employees towards the health insurance scheme of Employees' State Insurance Corporation to 4 percent, a move that’s estimated to result in annual savings of about Rs 5,000 crore for firms.

The previous ESI contribution rate was 6.5 percent. The reduced rates will be effective from July 1, 2019, the Union Labour Ministry said in a release. This would benefit 3.6 crore employees and 12.85 lakh employers.

“The government has taken a historic decision to reduce the rate of contribution under the Employees' State Insurance Act from 6.5 percent to 4 percent (employers' contribution being reduced from 4.75 percent to 3.25 percent and employees' contribution being reduced from 1.75 percent to 0.75 percent),” the ministry said.

As many as 12.85 lakh employers and 3.6 crore employees contributed Rs 22,279 crore towards the ESI scheme in 2018-19.

Back of the envelope calculations suggest that reduction in the ESI contribution rate for employers would results in annual savings of over Rs 5,000 crore to these firms.

The ministry said that the new ESI contribution rate will result in substantial relief to workers, facilitate further enrollment under the ESIC scheme, and aid formalisation of India’s jobs sector.

The cut will also reduce financial liability of the establishments, leading to improved viability and enhanced “ease of doing business".

It is also expected that the new ESI contribution rate will lead to improved compliance of law. The Employees' State Insurance Act, 1948, provides for medical, cash, maternity, disability and dependent benefits to insured persons under the Act.

The ESI Act is administered by ESIC. Benefits provided under the ESI Act are funded by the contributions made by the employers and the employees.

Under the ESI Act, employers and employees both contribute their shares respectively. The Government of India through Ministry of Labour and Employment decides the ESI contribution rate.

The government, in its pursuit of expanding social security coverage, started a programme of special registration of employers and employees from December 2016 to June 2017 and also decided to extend the coverage of the scheme to all the districts in the country in a phased manner.

The wage ceiling of coverage was also enhanced from Rs 15,000 per month to Rs 21,000 from Jan. 1, 2017.

Bloomberg Quint

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