(a) whether the Government has any proposal to keep the Employee`s State Insurance (ESI) and
Employee`s Provident Fund (EPF) schemes out of the purview of service tax;
(b) if so, the reasons therefor; and
(c) the reaction of the Ministry of Finance thereto and the action taken by it thereon so far?
MINISTER OF LABOUR AND EMPLOYMENT(SHRI MALLIKARJUN KHARGE)
(a) & (b): Service Tax has been imposed on Employees’ State Insurance Corporation (ESIC)
treating it as insurance provider and on Employees’ Provident Fund Organisation (EPFO)
treating it as a Banking/Financial Institution. The matter regarding keeping the ESIC and
EPFO out of the purview of Service Tax Act was taken up with Ministry of Finance explaining
the reasons as under:-
# ESIC and EPFO are an autonomous social security organizations under the administrative
control of the Ministry of Labour & Employment and they are established under the Act of
Parliament.
# Both organization are exempted from Income Tax under section 10(25)A of the Income Tax
Act.
# Both are discharging social security obligations of the Government under Articles 41
and 42 of the Constitution of India.
# Social Security is a comprehensive approach designed to prevent deprivation, assure
the individual of a basic minimum income for himself and his dependents and to protect the
individual from any uncertainties. The State bears the primary responsibility for developing
appropriate system for providing protection and assistance to its workforce. Social security
is increasingly viewed as a human right and an integral part of the development process.
Providing social security by the Government through ESIC and EPFO is not to be considered
as a taxable service.
(c): The Ministry of Finance has stated that as per the current provisions of law, service
tax is leviable on the services provided by ESIC and EPFO. Exemption to ESIC and EPFO would
be in the nature of first point end-use exemptions and a policy decision has been taken to
minimize them. It is an accepted principle of tax reform and administration that first point
end-use exemption is a poor practice which results in leakage and is difficult to monitor.
As a preparation for introduction of the forthcoming Goods and Service Tax (GST), efforts
are being made to widen the tax base with minimal exemptions. It should be prudent to keep,
to the extent possible, all the economic activities involving goods and services within the
GST regime, so that organizations providing taxable services can benefit from reduced
incidence of tax through a seamless flow of input credit.
In view of this the request for service tax exemption in respect of ESIC and EPFO has not
been acceded to by the Ministry of Finance.