Dear Satya,
I am not sure about the actual intention behind the Auditor's so called suggestion to remove the existing component of D.A from the salary structure of the employees in your industrial establishment which falls under the State's S&E Act as well as other allied laws viz., ID Act,1947, MW Act,1948, PB Act,1965 and PG Act,1972 in addition to the ESI and EPF Acts. It may be out of his interest in minimizing the indirect financial commitment of his client towards bonus, gratuity, subscription to EPF etc. But I am constrained to state that the Auditor might have glossed over the negative legal implications of such a sudden change. They are:-
(1) You can not do away with the existing component of D.A without issuing a notice u/s 9-A of the ID Act,1947 as it amounts to a change in service conditions stipulated at serial nos.2 and 3 of Schedule IV of the Act.
(2)Removal of D.A may result in proportionate addition to other components so that the amount of contribution to EPFS get reduced. It is an indirect reduction and prohibited u/s 12 of the EPF Act,1952.
(3) Since the MW fixed by the Govt under the MW Act,1948 includes V.D.A linked to Cost of Living Index, you have to be constantly vigilant and ensure that your industry wages do not fall short of the minimum wages due to the periodic hike in V.D.A.
(4) Since the deletion of the component of D.A from the salary structure would reduce bonus and gratuity of the employees, certainly they will oppose such a change.
Therefore, in my opinion, it is not advisable.