Economic growth has been on the rise in India. Since the reforms back in mid – 1990’s, subsequent governments are working towards making it easier for businesses to officially register in the country. The current government is developing avenues for Foreign Direct Investment (FDI) and the economy continues to become much more vibrant. A number of Multinational National Companies (MNC’s) have seized this opportunity and have expanded their business in and, are now part of the global economy operating in India. With twenty-nine states and 7 union territories, the challenge for new companies is to comply with state level legislations in addition to national regulations.
In this article, we will explore the fundamentals of payroll processing and compliance. We will examine the registration process while taking a deeper dive into payroll related compliance and taxations that the employer is responsible for. Be aware of our key insights, which we view as priorities for any company that is establishing business in the region.
1. Registering your company in India: All businesses are responsible for obtaining a Certificate of Incorporation (COI). Compliance with statutory rules requires central and state government registrations, which vary based on the nature and region of the business.
Consider these registrations:
– Tax Deduction and Collection Account Number (TAN) & Permanent Account Number (PAN)
– Provident Fund (PF)
– Professional Tax (PT), registration applicable as per state laws
– Labor Welfare Fund (LWF), registration applicable as per state laws
– Employee State Insurance (ESI)
– Shop and Establishment Registration (S&E), applicable as per state law
– S&E Monthly maintenance – Various physical registers as required
2. Compensation Structure: Companies doing business in India split the monthly salary into various components mainly derived from a tax calculation perspective, calling it the “Salary Package”. Apart from basic salary there are other benefits included such as HRA, Conveyance, Medical, LTA, Fuel. These items build up the salary package and employers must be aware that each will have its own tax exemption that are calculated based on the limits & regulations.
Separately from this, there can be additional payment and recovery components that are designed for and based on the nature, locality and sector of the business. This results in large set of salary components and an intricate tax management scheme for the payroll team to deal with and process accurately.
“The challenge for new companies is to comply with state level legislations in addition to national regulations.”
–Venkatachalam Muthu, APAC Regional Lead, STG
3. Tax Calculation and Compliance: Apart from calculating and remitting income tax monthly, companies need to submit quarterly Form 24Q electronically and provide Tax return certificate – Form-16 to employees at the year-end. Along with each central budget, expect a few changes that impact the taxable income & various exemptions. Interpretation of these changes is challenging and companies will need to seek an expert opinion to implement them. For example, in the budget last year, the government extended the “Home Loan Interest Exemption” benefit for those who took possession of a house within 5 years instead of 3 years. This means those who did not benefit from the exemption because of the earlier limit, will now be eligible as long as they have taken possession of the house from the developer within 5 years of initial home loan sanction date. With a potential increase in eligible employees, it is imperative to capture the correct loan sanction date, as the tax system portals do not acquire this information. This information must be verified and recorded properly before extending the tax benefit.
4. The Income Tax remains the most complicated payroll calculation with variety of exemptions with respect to the salary components, salary related claims, fringe benefits such as company leased accommodations or subsidized loans, loan deductions, investments and corporate driven donations. The Year-to-date tax liability is calculated based on actual / estimated taxable income before arriving at current month deduction. Any onetime payment (such as back pay, bonus, long service award, referral incentive) are taxed fully in the month of payment.
Normally employees are provided with a detailed tax calculation sheet along with their monthly pay slip. Companies or payroll providers must provide employees with an online portal for them to provide tax declarations (the estimation of intended investments, loan payments etc. in the beginning of the tax year), the ability to file monthly claims and submit investment proofs towards that will be due at the end of the tax year.
5. Employee Provident Fund (EPF/ PF): Applicable across the country and managed by the Employees Provident Fund Organization (EPFO) of India. Employers match the Employee contribution. The registration, reporting & claim procedure can be a timely and delicate process. Companies are also allowed to form their own trust and invest the funds based on approval and adhering to the stipulated guidelines in order to achieve a greater retirement pool for employees.
6. Gratuity: Employees with five or more years of service are eligible to receive pay that is equal to 15 days of work for each year of service completed at the time of resignation or retirement. These earnings are exempt from tax up to a limit of million rupees. Again, similar to PF, companies are allowed to form a Gratuity Trust and leave the management to an approved financial institution. There is a trend with companies changing over to this model which will help to improve budgeting over time.
7. Employee State Insurance (ESI): The purpose of ESI is to provide a basic social insurance for those earning less than ESI limit. In October of 2016 the ESI wage limit was revised from ?15000 to ?21000.
8. Labor Welfare Fund (LWF): The LWF is levied by some states and a small contribution of LWF from EE & ER are required to be deposited to state authorities twice a year and in some states it is paid annually.
9. Statutory Bonus: This is payable as per the Payment of Bonus Act, 1965. Recently, in order to determine the eligibility of the payment, the threshold wage limit of monthly salary was revised from 1000 to 21000.
10. Professional Tax (PT): In addition to the National Income Tax, this tax is levied at the state/province level and companies must separately register and deduct this from employees. Remittance of professional tax to state bodies is a monthly requirement in some states and in other states it is half yearly. Reporting requirements differ as well. Apart from regulatory requirement, internal company policies will also impact payroll calculations and benefits. Keep in mind that during payroll transformation it is extremely important to review the HR leave, overtime and other employment related policies to ensure that all of the benefits are accurately accounted for in the payroll.