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ESI wage ceiling enhancement proposal

The Ministry of Labour and Employment has, by way of a gazette notification, sought feedback regarding enhancing the ESI wage limit from Rs 15,000 per month to Rs 21,000 per month.

As you are aware, the current limit is Rs 15,000 – in other words, employees who draw an ESI wage of more than Rs 15,000 cannot come under ESI currently. If this proposal is implemented, employees drawing an ESI wage of up to Rs 21,000 will need to become ESI members.

As far as your organization is concerned, you may see some of the current employees (whose salary is between Rs 15,000 and Rs 21,000) getting into ESI for the first time on account of the wage ceiling enhancement. Also, there could be an increase in the cost to company on account of employer ESI contribution to such employees (who get added to ESI).

Should this be implemented for Oct 2016 payroll?

As of 22-Oct-2016, the date of this post, the wage limit enhancement to Rs 21,000 is still at the proposal stage. According to the gazette notification, all stakeholders can give feedback to the ministry on the proposal until the end of 30 days from the date of the notification (06-Oct-2016). The government will make a final decision on this after considering the feedback received, and publish a final notification if the wage ceiling enhancement is to be given effect.

Many payroll managers wish to know if the wage ceiling enhancement should be given effect for Oct 2016 itself. To our knowledge, some payroll managers have already implemented this for Oct 2016. Their argument is that the proposal will definitely be given effect from 01-Oct-2016 and hence they are better off implementing this in Oct 2016 payroll. We wonder on what basis they are so sure that the proposal will be implemented. Surely, hearsay cannot be the basis for implementing such an important change. What if the government does not implement this at all or implements this prospectively (and not from 01-Oct-2016)?

Our take

We need to wait for the final notification from the government for us to implement this in payroll. There is no legal basis for implementing this for Oct 2016 payroll when the government is yet to issue the final notification. In other words, no payroll manager should second-guess governmental decisions.

As far as future is concerned, there are 3 possibilities.

Scenario 1: The wage ceiling enhancement does not get implemented by the government.

Action required: Nothing, since it would mean status quo with regard to ESI wage limit.

Scenario 2: The wage ceiling enhancement gets implemented in November 2016 or later with prospective effect.

Action required: You will have to implement this in payroll from the date from which it is given effect by the government.

Scenario 3: The wage ceiling enhancement gets implemented in November 2016 with retrospective effect (say, from 01-Oct-2016).

Action required: If the wage ceiling enhancement is given effect from 01-Oct-2016, you will need to re-run Oct 2016 payroll as soon as the notification comes (say, in Nov 2016 first or second week before the deadline for Oct 2016 ESI remittance) and ensure that you do the ESI deduction for the additional employees in Oct 16 payroll. Since you would have completed Oct 16 payroll processing by the last week of Oct 2016, you will need to decide on how to recover the ESI deduction for Oct 16 from the individual employees (whose salary is between Rs 15,000 and Rs 21,000 in Oct 2016). Of course, documents such as salary register and payslip would undergo a change for the employees who are impacted.

We hope the government takes into account the problems that employers are likely to face in implementing wage ceiling enhancement retrospectively, while announcing its final decision in this regard.