The small and medium enterprises should be allowed to outsource their statutory obligations such

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as provident fund management, gratuity payments and insurance for workers to enable them to focus on their core business, Industry Ministry has proposed.

In a discussion paper, the Department of Industrial Policy and Promotion (DIPP) has suggested creation of new service entities to which most of the statutory compliances, under the labour laws for small and medium enterprises (SMEs), can be outsourced.

It said that the proposed entity could create a trust, as allowed under the Employee Provident Fund (EPF) Act.

The industry can have the option of asking the entity to provide pension in lieu of or in addition to the provident fund.

Similarly, the service entities could have its own medical facilities or could tie-up with other hospitals to guarantee the services required under the Employees State Insurance (ESI) Act. The move would not even need an amendment to the ESI Act since there is already a provision for such an option.

"The proposed concept implies that, short of assuming the criminal liabilities of the companies, most business related statutory liabilities can be assumed by this entity," it said.

Under the proposal, the outsourcing service entities can double up as insurance companies and provide a job loss policy cover in case of retrenchment.

Giving the rationale for the proposal, the paper said that while large industries can engage professionals to comply with the statutory obligations, SMEs are largely single-man or family-managed entities. They do not have resources to employ full-time professionals to manage the legal compliances.

The paper also raised questions such as whether the business model was capable of attracting private sector participation and if the existing players in the insurance sector will be willing to take up the activity in addition to their present mandate.

"The new service entity...Is expected to be more efficient, economical and financially better equipped to serve the interests of both the employers and the employees. The industry can then concentrate more on their core activities like production and marketing," it added.

The paper said given the multiplicity of compliances, it becomes virtually impossible for SME units to fulfil all the obligations as required by law. The compliances range from remitting contributions to filing periodic returns besides maintenance of registers and records.

"As a result they are often forced to sidestep the burden of compliances by engaging casual/contract labour or resorting to more and more mechanisation," it said.