It is a common belief that the scope of statutory compliance in an organisation is limited to deducting taxes from employees and remitting it to the government. While it is partially true, statutory compliance also ensures that the organisation provides adequate benefits to employees as well.
Let us first learn about tax compliance and importance of compliance in business. This needs to be further split into four parts: Withholding, Contributing, Remittance & Reporting.
Withholding: Every employer is empowered to implement certain tax rules as mandated by the respective agencies of the government. In India, employee salaries are subject to certain deductions towards Income tax, Provident fund, ESI, Professional tax and Labour Welfare Fund.
Contributing: At the same time, the employer is under obligation to contribute towards some of the above mentioned compliances for welfare of the employees. Each of these compliances are again governed by a set of rules and formula.
A summary dashboard of employer-employee obligations is attached below:
Type of compliance-Income tax
Coverage-Slab based- tax is computed on annual potential earnings but is deducted on monthly basis - no direct benefit to employee
Type of compliance-Provident Fund
Coverage-Percentage based – accumulates to provide a good corpus (with interest) for retirement. Allows employee to contribute additionally. Employee contributions are eligible for tax rebates too
Type of compliance-Employee State Insurance
Coverage-Percentage based – covers eligible employees and family members for hospitalisation & medical costs
Type of compliance-Professional Tax
Coverage-Slab based – State sponsored tax – depends on amount of income earned – Employee contributions are eligible for income tax rebates - no other direct benefit to employee
Type of compliance-Labour Welfare Fund
Coverage-Fixed amount – one time contribution - no direct benefit to employee
Type of compliance-Statutory Bonus
Frequency-Depends on Company’s policies but to be disbursed once a year
Coverage-Percentage based - dependency on profitability of the organisation – payable to eligible employees only
Type of compliance-Gratuity
Coverage-Percentage based - payable only upon completion of 5 years AND upon conclusion of employment contract
Type of compliance-Maternity Bonus
Coverage-Fixed amount – payable as and when claimed by employee in prescribed form
Remittance: Once the withholdings are computed and deductions done for the month from the employee, the employer has to make arrangements to remit them to the respective departments of the government along with the organisation’s own contributions. There are specific timelines & formats by when they need to be remitted. Most of the remittances can now be done online through the banking system. Be sure to obtain and retain receipts or challans once the remittance is made.
Reporting: It is now time for filing of ‘Returns’. A return is a detailed report to be submitted by an organisation to the respective government departments accompanying the remittances. This report contains information of income paid to its employees and the taxes deducted thereof. This report should match to the remittance made. Again, the respective returns are to be submitted as per specified timelines and formats.
Assessments & Internal Audits:
Authorised inspectors or enforcement officers of government departments are required to audit the remittances and returns for each completed year in order to check for any discrepancies or possible violations. These audits are called ‘Assessments’. Once the assessment is completed and found to be in order, the organisation will receive a closure certificate.
Apart from the government’s scrutiny, one of the most favourite areas for internal auditors to review is the statutory compliance. Without doubt, this is the most important function of any Payroll department in an organisation and utmost care needs to be taken in this process. There is so much at stake in terms of penalties, additional scrutiny, reputation of the Company, etc.
Consequences of violation:
While failure to withhold taxes is in itself an offense in the eyes of law, non-remittance of such withheld amount to the government is generally treated as a bigger offense. Both attract penal interest and damages and if it is proven to be a deliberate attempt to violate the provisions of the law, there could be imprisonment of the employer.
There are a plethora of statutory obligations of an employer pertaining not only to direct employees but contractors or vendors as well, that the organisation might hire to manage it’s business. Here, the employer automatically attains the status of a ‘principal employer’ and has to ensure compliance by these service providers too. Copies of challans and returns must be obtained and retained for any inspections by the government.
Payroll and Statutory compliance is a specialised subject and many prefer it to be managed by professionals due to constant changes in rules and also keeping in mind the adverse impacts of non-compliance. greytHR software has the capability to help you manage the entire process seamlessly, based on more than two decades of experience in this field and employers can use this payroll software for any business. The system will support in (a)computation of the right taxes (b) preparation of accurate reports/challans and (c) link the system to government portals for remittances and filing of returns as well.