TeamLease RegTech

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Jun 10, 2022
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Micro, Small and Medium Enterprises (MSMEs) play a crucial role in the Indian economy, contributing roughly 27% to the Gross Domestic Product (GDP). With more than 6 crore units generating 11 crore jobs, MSMEs are instrumental in fostering entrepreneurship and employment, often bringing in the benefits of industrialisation to the rural and backward areas.


At the same time, MSMEs are subject to a host of regulatory obligations, especially as they expand in their size and operations. This article will explore the compliance requirements applicable to MSMEs with respect to the Employees’ Provident Fund Scheme (EPFS).


What is EPFS?

It is a social security scheme established under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952. It operates on a Union level and applies uniformly across all States. The basic aim of the scheme is to inculcate a habit of saving among the salaried class towards building a sufficient retirement corpus. Under EPFS, both the employee and employer have to pay a percentage of equal contribution in the employees’ provident fund account. On retirement, the employee receives a lump sum amount of the total contributions made by the employee and employer (with interest on both). 


Are there other related schemes?

Apart from EPFS, the Act also provides for two other schemes - Employees’ Pension Scheme (EPS) and Employees’ Deposit-Linked Insurance Scheme (EDLIS) - to provide superannuation/retiring/disablement pension and life insurance benefits respectively. Together, the three schemes are managed by the Employees’ Provident Fund Organisation (EPFO), a statutory body under the administrative control of the Ministry of Labour and Employment.


Does it apply to MSMEs?

The Act applies to any establishment with 20 or more employees. Hence, any MSME that employs 20 or more persons is bound to make contributions towards the three schemes, as provided under the Act.


What is the contribution to be made?

The employee and the employer each make a contribution of 12% of the employee's basic salary. While the entire contribution of the employee goes towards EPFS, only 3.67% of the employer's share goes towards EPFS, while the remaining 8.33% is contributed towards EPS. Additionally, the employer makes a contribution of 0.5% each towards EDLIS and administrative charges.


What are the compliances involved?

First, the employer must register with EPFO within 1 month of reaching an employee strength of 20. The registration formalities can be completed online through the EPFO portal. The details to be furnished include name and address of establishment, incorporation date and PAN, among others. If the establishment is a factory, details such as factory licence number, date of licence and place of issue must be provided. MSMEs are also required to furnish their Udyam registration details.


Second, the employer is required to fill certain forms. Many of them can be filled online including Form 5 (return of employees qualifying for membership) Form 5A (particulars of ownership by employer), Form 6A (consolidated annual contribution statement), Form 10 (return of members leaving service during the month), Form 12A (statement of contribution), Form 13 (application for transfer of EPF account) and Form 19 (claiming EPF dues). However, some have to be kept in the physical format such as Form 11 (declaration by person taking up employment in organisation).


Third, there are certain responsibilities to be fulfilled by the employer. These include filing of monthly return in electronic challan cum return (ECR) format, submission of particulars of employees joining or leaving, approvals for Aadhar card and other KYC-related documents of employees and timely settlement of claims by providing the approvals through the EPFO portal. The employer must also display a copy of the rules of the funds (with a translation in the language of the majority of the employees) on the notice board of the establishment.


What are the consequences of non-compliance?

Any false statement or representation made to avoid payment under the Act is punishable with up to 1 year of imprisonment and/or fine of Rs. 5,000. Failure to make payment for inspection or administration charges can attract imprisonment for up to three years and a fine of Rs. 10,000. Any other contraventions under the Act for which no penalty has been explicitly provided is punishable with imprisonment of up to 6 months and a fine of up to Rs. 5,000.


Are there any relaxations for MSME?

Neither the Act nor any other legislation provides any distinct relaxation to MSMEs for meeting their EPFS contributions. However, from time to time, the government notifies certain benefits for MSMEs to help reduce their EPFS obligations. For instance, during the pandemic in March 2020, the Finance Minister had announced that the government would bear 24% contribution of both employee and employer combined for all MSMEs for a period of three months. This was aimed at boosting cash flows and liquidity in MSMEs, which had taken a huge hit during the initial lockdowns. It remains to be seen whether the government will propose any new relaxations for MSMEs in the near future to soften the blow of post-pandemic financial pressures. 

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