New Delhi: The labour ministry may allow small companies with fewer than 20 workers to deduct only 9% of salaries towards provident fund (PF) instead of the mandatory 12%, seeking to reduce the burden on both employees and employers, who have to make a matching contribution.

The move is being discussed following a government proposal to bring all companies employing between 10 and 20 workers under the ambit of the Employees’ Provident Fund Organisation (EPFO) to extend the social security net to hundreds of thousands of employees working in small factories.

Currently, only companies with more than 20 workers are under the EPFO’s jurisdiction.

The labour ministry is of the view that firms with fewer than 20 people on the rolls cannot be burdened at one go with a 12% deduction each from employees and employers towards PF contributions, two officials familiar with the matter said on condition of anonymity.

EPFO has a retirement corpus of more than 6 trillion under its management and an active subscriber base of nearly 45 million.

One of the two government officials cited above said the labour ministry and the EPFO seems to have decided to reduce the PF contribution to 9% of salaries for such small companies that will be entering the EPFO for the first time.

“Poor workers need social security and EPFO gives two benefits—retirement savings through PF and pension through employees’ pension system. So, at the end of the day, workers will benefit in the long run. Though initially, the talk was to fix something between 12% and 9%, authorities seems to have zeroed in on the lower base," said the first official.

Labour secretary Shankar Agarwal said the ministry does not want to burden the new EPFO entrants with large mandatory deductions for PF. “We are building the provision through the proposed amendment to the Employees Provident Fund and Miscellaneous Provisions Act," Agarwal said.

As per the EPF amendment proposal, if the “central government is of the opinion that having regard to the financial position of any class of establishments or other circumstances of the case, it is necessary or expedient to do so, it may, by notification in the Official Gazette, and subject to such conditions, as may be specified in the notification, reduce or waive the contribution payable by the employees for such period as may be specified in the notification".

“Provided further that in case of an establishment to whom the Act applies but who have engaged less than 20 persons in the preceding financial year, the central government, after making such inquiry as it deems fit, may, by notification in the Official Gazette, specify that the contribution shall be any amount between 9 % and 12% as the case may be and substitute for the words ―twelve percent, at the places where they occur, the said percentage of contribution."

Mint has reviewed a copy of the proposal made last month.

The second government official said the EPFO may offer a timeline of three years to these small companies to increase PF contribution from 9% to 12%.

Chandrakant Salunkhe, president of the SME (small and medium enterprises) Chamber of India, said small factories would welcome the move.

Salunkhe said the PF contribution should be lowered even more. “They should also allow SMEs deploying more than 20 workers this benefit," said Salunkhe.