Row over service tax on employer money in ESIC

The finance and labour ministries have locked horns over imposition of service tax on insurance premium paid to state-run ESIC by employers for the health insurance cover of their employees.

Last Updated: Oct 22, 2010, 21:59 PM IST

New Delhi: The finance and labour
ministries have locked horns over imposition of service tax on
insurance premium paid to state-run ESIC by employers for the
health insurance cover of their employees.

"There is no point in charging service tax on amount
contributed by the employers towards the payment of premium
for getting their employees covered under ESIC health
insurance scheme", Labour Secretary P C Chaturvedi said.

The comment assumes importance as ESIC headquarters in
Delhi reported to the labour ministry that its branch offices
across the country have received notices demanding service
tax.

Employees` State Insurance Corporation (ESIC) provides
health insurance to all workers whose monthly gross pay is up
to Rs 15,000. ESIC scheme is mandatory for all factories with
10 or more workers and retail trade establishments with 20
workers or more.

Confirming that the Labour Minister Mallikarjun Kharge
has sent a missive to the Finance Minister Pranab Mukherjee,
Chaturvedi said, "It is not a commercial activity and this
social security benefit is mandated under the law."

The labour ministry had earlier raised objection to the
levying of service tax on the contribution of employer to EPFO
as administrative charges.

Chaturvedi said, "There was similar demand of service tax
on the amount paid by employers as administrative charges to
Employees` Provident Fund Organisation (EPFO)."

"EPFO and ESIC are created under the Acts of Parliament
to provide social security benefits to workers. These are not
incorporated under the Companies Act 1956 for profit
maximisation," he added.

ESIC provides same insurance benefit to all subscribers,
irrespective of the amount of premium contributed by an
employee and his employer.

ESIC has an annual income of around Rs 4,500 crore with
5.5 crore beneficiaries under its net.

This is for the second time in a year that the two
ministries have locked horns over taxability of social
security schemes. In November last, a similar service tax
demand was raised on the retirement fund manager EPFO.

Employers currently pay 1.1 per cent of provident fund
contributions as administration charges.

ESIC`s health insurance scheme is contributed by
employers and employees. Employers pay 4.75 per cent of gross
pay and employees contribute in 1.75 per cent of that to ESIC
for the health coverage.

-PTI