India’s status as a global business hub is rising. In 2019, Indian economic growth is predicted to reach 7.4% (a pace which has rivalled China over the past decade) while, in 2018, the World Bank placed India at 77 on its Ease of Doing Business survey - a 23 rank improvement from 2017. But while its business credentials are impressive, like any international destination India also presents challenges, not least in achieving payroll compliance.
From the numerous complicated calculations and rules applied during the pay-cycle, to navigating state-level laws and coordinating between government authorities, there are plenty of ways the Indian pay process can trip payroll departments. Complicating things further, in an era of digital tax some aspects of Indian payroll have been transformed by automation but many still involve the manual submission of paper documents.
If you’re opening a business in India or are looking for ways to build efficiency into your existing payroll, understanding these specific challenges is a crucial compliance step. To help you prepare, let’s explore some of the common obstacles you’ll face during the pay-cycle...
1) Collecting Investment Declarations and Proofs
The investment declaration is a form which employees submit at the beginning of each year to detail their investment plans, and access certain tax exemptions and deductions. Payroll departments must make sure employees know how to submit their declaration, and collect them in a timely manner to avoid disruption, or other tax-related confusion, at the end of the year. Payroll is also responsible for collecting and verifying proofs of employee investments against previously-submitted declarations.
2) New Hires
Whenever an employee is hired, their new employer’s payroll team (or administrator) must obtain tax details pertaining to their previous employer - details which will allow the employee to be taxed correctly in their new role. The relevant tax calculation information is collected on the employee’s Full & Final Settlement which they receive when they leave their previous employer. If that information isn’t obtained and submitted, it is the employee who is required to pay the difference when they file their income tax return.
Like end-of-year investment proofs, employees who leave their company need to provide payroll with the same proof documents so that investment figures can be verified and tax calculated. Once again, without the proof documents, departing employees will not receive any of the tax exemptions or benefits they would otherwise have had access to - and will be taxed at the standard rate.
4) Flexible Benefits
India’s income tax regulations allow employees to design their own salary structure (with limitations) and include flexible benefit plans with tax free expense components. In these cases, the tax free benefits are often included in the employer’s cost to company, but payroll departments must know how to handle them during the pay cycle to ensure tax is withheld correctly.
Payroll departments must also collect proofs of expenses in order to grant the tax exemption: unclaimed expenses will not be paid until March of the following year, after tax has been deducted.
5) Filing Returns
One of the most common administrative tasks for Indian payroll teams is to manage numerous official tax returns and supporting documentation due from both employers and employees throughout the year. These include:
● Tax Deducted at Source Return: Reporting all income tax deducted and paid, TDS Returns need to be filed by payroll in July, October, January, and May - full tax computation must be included in the last quarter’s return.
● Form 16: Issued by employers to their employees, Form 16 contains contains the details of the employee’s tax deductions for that year. The form 16 deadline for employers is 15 June.
● Employee Income Tax Return: After Form 16 is issued, employees have to complete their individual income tax returns - by the tax authority deadline.
Bear in mind that employee queries can significantly slow down and disrupt various payroll form-filling processes at any point. Given the emphasis on manual documentation, Indian payroll officers should have a mechanism in place to handle queries with as little disruption as possible.
6) Provident Fund
Payroll departments have a number of duties and responsibilities regarding the Provident Fund (which both employers and employees contribute to), and should be familiar with the process of communicating with the PF authority. Payroll teams must take care of employees’ Know Your Customer obligations to the PF (in order to obtain UAN numbers), onboard new hires, and handle any PF transfers, withdrawals, and advances.
7) State Taxes, Insurance, and Labour Welfare Fund
Certain tax and insurance rules vary from state to state and payroll departments must know what contributions to withhold and when. Both Employee State Insurance (ESI) and Professional Tax (PT) are not applicable in all states, but obviously involve compliance obligations in the ones where they do. Similarly the Labour Welfare Fund (LWF) is managed by state boards which will determine what, if anything, needs to be contributed by employees and employers.
For more information on India’s payroll and tax legislation, browse activpayroll’s India Global Insight Guide.