The Provident Fund Bomb - Good in some ways but a setback for small businesses & professional entrepreneurs

The government 2 months ago finally issued a notification increasing the wage limit for PF coverage to Rs.15,000 from the current Rs.6,500. While this is good for the labour force in the long term, as they will have a significantly large PF kitty in the future, it will be a setback for small businesses who have crossed the 20 employee threshold across the industry. Kindly see my previous post detailing PF for restaurants - http://restobizindia.blogspot.in/2014/08/pf-is-there-way-to-get-out-of-it.html.

While I feel quite good that the labour force will eventually benefit from this, I also feel that this will make things more challenging for entrepreneurs and for those trying to run businesses professionally.

For the restaurant business in particular, this will mean a few things:

1) Staying small (as in just 1 unit) will make even more sense now, as opposed to having a few units: With just 1 unit, the number of employees can be kept below 20 (atleast officially) and restaurant businesses can avoid getting themselves registered for PF. This will further reduce the interest amongst professionals looking to start-up scalable restaurant businesses as their margins will come under additional pressure.

2) Really large restaurant businesses will have minimal impact as they already cover all their employees under PF. Smaller businesses earlier had an option not to cover employees whose basic + DA was more than 6,500. Now that limit has been increased to 15,000. This effectively means that almost all employees will have to be covered under PF. If the basic + DA of an employee is 10,000, a total PF contribution of Rs.2,400 will need to be made. If the employee's CTC is kept the same as it is now, the take-home salary of the employee will go down by Rs. 2,400 (almost 25% of the current take-home salary of a employee earning Rs.10,000). So the businesses will have no choice but to increase the salary to offset this reduction in take-home.

Based on this and the already existing challenges, I will work on a post on some of my predictions for the restaurant business in the near future. These will be particularly applicable for those who want to run a professional & fully compliant restaurant business with an aim to attract investors and build a large business.Watch out for this post.