ESIC Inspection: Addressing Balance Sheet Discrepancies and Wages Compliance

Dear Seniors,

Greetings!

ESIC registration was done in October 2012, and now an inspection will be conducted in the 1st week of December 2013.

My issue is that:

We gave a salary of around 5 lakhs to employees until March 2013, but for tax-saving purposes, the company had not shown this amount in the balance sheet. In the balance sheet, the company only showed 1.2 lakhs as salary. We deducted ESIC on 4.5 lakhs until March 2013 (ESIC wage). Our balance sheet was already finalized in March 2013 with 1.2 lakhs salary details. So, now what will be the solution? And what would be the impact at the time of inspection?

Regards,
Mahima

Dear Member,

I understand that the Inspecting Authority (Social Security Officer) of ESIC will try to tally the amounts disbursed in the Payment of Wages Register with the Accounts Heads of Ledgers of your factory/establishment. In case the amounts of wages shown in the Payment of Wages Register (on which, as mentioned by you in the above remarks, the contribution is reported paid) tally with the entries in Wages Heads of Accounts Books, then perhaps the Inspecting Officer will not require the Balance Sheet of your establishment/factory. Otherwise, in my opinion, your factory/establishment can explain the position to the Inspecting Officer accordingly, as mentioned by you.

With regards;

Why is the ESI inspecting authority verifying the balance sheet? Find out any differences between the balance sheet and the salary register. As far as salary/wages are concerned, the data in the salary/wages register is important. Besides wages/salary, many other heads of accounts are reflected in the balance sheet. If the balance sheet wages are higher than the register, the difference amount will be deemed as omitted wages. If the wages amount is higher than the balance sheet, it will be ignored.

Other than wages, labor charges paid inside/outside the factory, loading and unloading charges, staff welfare, and overtime wages will attract ESI at 6.5%, which will be calculated, and a spot letter will be issued.

Regards, V. Subbarao

Dear Mr. Mahima,

Any company aiming to leverage IT for advantage would typically increase salaries and wages. It is surprising that you have reduced them for IT purposes.

Anyhow, ESIC could draw an adverse inference that your balance sheet is not reliable. Are you under compulsory audit zone? Please consult your auditors and take necessary action.

Regards,

S. Sankaralingam
Retired Senior Deputy Director, ESIC
Advocate and Labour Law Advisor
Mobile: 09790754727
Email: srihari1953@gmail.com

Thank you, Sir.

Will he take copies of documents as proofs, such as salary details, attendance records, challans, balance sheets, etc., or will he just inspect the items?

Regards,
Mahima

Sir, thank you.

The company is new, and things are in the process of getting aligned. Auditing is being done by a CA firm. I asked them about the issue, but their reply was not satisfactory. Please suggest what could be done next in this case.

Regards, Mahima

Dear Member,

With reference to your remarks as above, I suggest that you read Section 45 of the Employees' State Insurance Act, 1948, which details the powers of the Social Security Officer, and his functions and duties. As a matter of practice, the inspecting officer will only review the records. However, for certain documents that he desires, he can obtain copies from your establishment. The aforementioned section of the Act empowers the Social Security Officer to obtain copies of the documents.

I recommend that in the future, ensure that the amounts of all types of wages, including those paid to regular, casual, temporary, and contract-based workers, are accurately reflected and reconcile in the accounts books of the factory/establishment. From the challans paid by the factory, the Time Office Incharge or HR staff (as you may refer to them) should be able to establish/prove that compliance with all wages has been met, and returns such as contributions, Accident Reports, and Declaration forms have been submitted. Additionally, you must demonstrate that the required registers as specified under the said Act are properly and routinely maintained. Please also verify that all your staff members have ESI Identity Cards and their family cards.

The maintenance of all registers as specified under the ESI Act, along with the production of complete records and evidence that contributions have been correctly paid on all wages as indicated in the Payment of Wages Register and Accounts Books, will facilitate the verification of records satisfactorily. With regular attention in the future, the Time Office/HR staff need not worry about such inspections.

Please let me know if you need any further assistance or clarification.

Best regards,

[Your Name]