Statutory Compliance Checklist for Starting a Business in India

India is emerging as one of the fastest-growing economies globally and is projected to become the 3rd largest economy after the USA and China in the next few years. The Corporate sector has a major role to play in this growth and this can be achieved only when they adhere fully to all the statutory rules and regulations. Therefore, it is important that any startup, whether big or small, has to fully comply with these laws. In this article we have compiled a detailed statutory compliance checklist that will safeguard the business. We hope this would be a Start-up guidance for being fully compliant of all statutory requirements.

What are Statutory Compliance and the Risks of Non-compliance!

Statutory Compliance is a framework established by the Government to regulate the operations of a business and entails meeting legal, financial, and regulatory requirements. This includes how a business treats its employees, handles its finances and HR policies. Every company regardless of its size or industry has to ensure fair treatment of the employees, safe working conditions, and regular payment of salaries, taxes, and other benefits.

Statutory compliance is a legal framework and any non-compliance will attract legal proceeding that includes fines, legal issues and damage to reputation. Complying with these compliance deadlines ensures that you are:

• Avoiding Legal pitfalls: Non-compliance or late filing can lead to fines, penalties, or more severe legal ramifications.
• Streamlining Operational Efficiency: Regular compliance will ensure smooth operational efficiency and avoids last minute rushes that can disrupt the business processes.
• Upholding Company Reputation: Being recognized as a compliant organization boosts stakeholder confidence and maintains business goodwill in the industry.

Companies in India, including start-ups must ensure compliance in 4 key areas.

1.  Industrial Relations

The provisions with regard to the payment of salaries and other benefits to employees top the list as they have to be strictly adhered to. To this effect, the provisions under the Minimum Wages Act, 1948, the Payment of Wages Act, 1936, the Payment of Bonus Act, 1965, the Maternity Benefit Act, 1961, the Equal Remuneration Act, 1976, need to be strictly implemented. In addition to these, the Social Security contributions through the Employees Provident Fund and Miscellaneous Provisions (Amendment) 1992, The Employees State Insurance Act,1948, the Labour Welfare Fund and Payment of Gratuity Rules, 1976 have to be given due importance.

2.  Labour Laws

The provisions of the Labour Laws lays out the working conditions of the employees like fixed working hours, overtime, maintenance of workplace safety standards, and prevention of discrimination on the basis of race, colour, gender or sexual orientation.

3.  Tax Compliance

Tax compliance is the willingness of a taxpayer to abide by the applicable tax laws, file tax returns and pay the tax dues within the stipulated period. Tax compliance is, therefore, crucial for all businesses and being fully compliant will ultimately facilitate business growth. The types of tax compliance includes the Central taxes such as the Income Tax Act (IT), Goods & Service Tax (GST)and Customs Act and the State Government taxes like Professional Tax, Stamp Duty & Registration Fees Act, Road Tax & Motor Vehicle Act and Excise Duty. The relevant registrations like PAN, TAN, and GST are mandatory. The relevant Income Tax Returns, audits, GST Returns need to be filed along with the tax dues within the stipulated time.

4.  Additional Compliance

In addition to these there are compliance laws that pertain to environmental clearance, data privacy regulation and IP protection.

The Risks of Non-Compliance

Non-compliance of the Statutory Rules and Regulations can bring about potential harm to the entire working of the company. The risks stemming from non-compliance are far-reaching and can seriously affect the company’s credibility, performance, and overall growth. We envisage the following risks of non-compliance:

1.  Imposition of Fines and Penalties

Non-compliance can lead to the imposition of hefty fines and penalties by the concerned authorities. This will negatively impact the working of the company.

2.  Loss of Productivity and Revenue

The workplace is thrown into disharmony due to non-compliance especially if the social security schemes have not been complied with. This disharmony leads to a loss of productivity and revenue.

3.  Damages the Brand Image and Business Integrity

Non-compliance damages the Brand Image and Business Integrity of the company and this will negatively impact the company’s standing and growth.

4.  Loss of Customer Loyalty

Customer Loyalty is negatively impacted by non-compliance leading to loss in business volume.

5.  Government sanctions and license suspension

Non-compliance when serious and repeated many times will bring about sanctions and ultimately may lead to license suspensions by the government authorities.

Statutory Compliance Checklist

This Statutory Compliance Checklist has been designed keeping in mind the 4 key areas that companies need to be compliant with.

1.  Industrial Relations

Complying fully with the rules and regulations enshrined in the Acts pertaining to Industrial relations will ensure fair working conditions, smooth resolution of disputes, and prevention of discrimination in the workplace. These rules and regulations are meant to strengthen the interests of the employees and employers and pave the way for a fair and harmonious work environment.

1.1 Minimum Wages Act, 1948

The calls to pay Minimum wages to employees had been an oft-repeated demand much before India gained Independence, and this call fructified after Independence when the Minimum Wages Act was passed in the year 1948. The Act ensures the payment of minimum wages to employees and this figure is decided at the national, state or district levels. The minimum slab may be arrived at based on the occupation and cost of living of the region where the business operates.

The Act prevents the exploitation of employees and ensures that they receive fair remuneration for their work.

1.2 Payment of Wages Act, 1936

The Act was enacted in the year 1936 to ensure that the employees receive their wages on time and in full. The Act regulates the payment of wages and lays conditions on the timing, mode of payment and deductions from wages that are allowed. Depending on the number of employees, the wages have to be paid before the 7th or 10thday after the end of the wage period. Unauthorised deductions are prohibited and it limits deductions for fines, damages or advances to specified percentage of the wages.

1.3 Payment of Bonus Act, 1965

Any company having 20 or more employees is subject to pay an annual bonus under the Payment of Bonus Act, 1965. Under this Act, eligible employees are entitled a minimum bonus of 8.33% of their annual wages or ₹ 100/-, whichever is higher. There is a maximum cap of 20% bonus payable.

1.4 The Maternity Benefit Act, 1961

The Maternity Benefit Act, 1961 has been passed to protect the health and well being of pregnant women and new mothers in the workforce. Under the Act, eligible women employees are entitled to maternity leave of 26 weeks of which 8 weeks of leave can be availed before the expected date of delivery. Employers have to pay full wages during the maternity leave period, thus ensuring that pregnant employees can avail leave without facing any financial hardships.

1.5  EPF and ESI

The Employees Provident Fund & Miscellaneous Provisions (Amendment) Act, 1992 was enacted to implement social welfare and employee security measures. The Act requires the Employee to contribute 12% of the Basic salary + DA towards the Fund with an equal amount being contributed by the employer. These contributions accumulate during the service period and can be withdrawn at retirement, resignation, or in case of any emergencies. The Employer is entrusted with the job of maintaining these records and remitting the contribution amounts to the department every month without fail.

In addition to this, the Employees State Insurance Act, 1948 offers social security benefits to employees in case of sickness, maternity, disablement, or death due to occupational hazard. Both the employee and employer contributes towards this fund at 0.75% and 3.25% of wages respectively. These contributions fund the Employees State Insurance Corporation (ESIC) and provide medical and cash benefits to insured employees and their families.

Employers have to strictly adhere to the rules and regulations, and any non-compliance will entail payment of penalty of up to ₹ 10,000/- and may also have to face imprisonment of up to 3 years.

2.  Labour Laws

The labour laws are meant to safeguard employees from discrimination and exploitation on the grounds of gender. They enable all employees regardless of gender to be equally remunerated.

2.1 Equal Remuneration Act, 1976

This Act was passed to encourage gender equality as it prohibits paying women lower wages when compared to men for the same work. The purpose of this Act is to prevent discrimination against women and to economically empower them.

2.2  Sexual Harassment of Women at the Workplace (Prevention, Prohibition and Redressal) Act, 2013

The Act was enacted to prevent sexual harassment of women in the workplace and address them with diligence and in a fair manner. Any company that employees 10 or more employees has to form an Internal Complain Committee (ICC) to investigate sexual harassment complaints and is empowered to give verbal or written warning, transfer, suspend or terminate the accused if found guilty.

Not forming the ICC is non-compliance that would result in a fine of up to ₹ 50,000/- and additional fines will be imposed for additional non-compliance. The aggrieved employee can approach courts for legal action against the accused.

2.3 Health and Safety at the Workplace

This statutory compliance operates under the Factories Act and 12 other similar acts pertaining to Industrial Safety and Health.  The Occupational Safety, Health and Working Conditions Code, one of the Codes under the New Labour Laws subsumed these13 Acts.  The New Labour Laws were passed by parliament and notified by the Government, but is yet to be implemented.

The safety guidelines apply to all factories, mines, constructions sites and offices. The law and its rules ensure the prevention of occupational accidents, injuries and diseases. Non-compliance can lead to fines and legal action, leading to imprisonment for negligence as an employer.

2.4 Payment of Gratuity Act, 1976

Any company or start-up with 10 or more employees is governed by this Act. The Act envisages the payment of Gratuity to employees who have completed 5 years of service with the company. Contravention of the Gratuity Act can result in a fine of ₹ 20,000/- or imprisonment up to 2 years or both.

3.  Tax Compliances

The Government needs to mobilize significant amounts of tax to finance infrastructure development programs. Both the Central and State Governments impose taxes on companies that are required to comply with each of these tax laws. We can classify taxes in India into two types, namely Direct and Indirect Taxes.

3.1 Direct Taxes

Direct Tax is the Tax that a company or individual pays directly to the respective governments. Some of the Direct Taxes in India are:

• Income Tax or Corporate Tax
• Capital Gains Tax
• Security Transaction Tax
• Dividend Distribution Tax
• Gift Tax
• Wealth Tax

These taxes are levied based on the respective tax legislation. The Income Tax Act of 1961 requires corporate or start-ups to ensure that Tax Deducted at Source (TDS) is deducted according to taxable income of the assessee. Under the TDS rule, every payment made to an assessee is subject to a TDS deduction. Employees have to deduct TDS from the employees’ wages and remit it to the department. The employees can then file a TDS return to claim a refund of the deducted TDS.

3.2 Indirect Taxes

Indirect Taxes are levied on the consumption of goods and services. The amount of taxes has no direct linkage with personal income or business profit. The following are the Indirect Taxes levied in India.

• Goods and Services Tax (GST)
• Service Tax
• Excise Tax
• Entertainment Tax

For being compliant with the Indirect Tax laws, companies need to follow the underlying tax legislations. Voluntarily disclose taxable activities, remit the tax payments within the stipulated time limits, and perform tax audits and documentation.

GST is the most important Indirect Tax legislated by the government. The new GST rules were passed under the 10th Constitution Amendment Act of 2016. All companies are required to comply with the rules under these amendments. Service Tax, Excise Duty, Customs Duty, Entry Tax, Entertainment Tax, etc., are all consolidated under one single indirect tax, the Goods and Service Tax (GST). Though the implementation of GST is complex it is essential to know the category of GST applicable to one’s line of business and comply with the rules.

3.3 Tax Liabilities for Investors

Start ups that receive funds from Investors are subject to taxation as these investments are deemed as “Income from other sources”. This is taxed at corporate rates under sections 56(2) and 68 of the IT Act. Angel Tax i.e., tax levied on investments into a Company through sale of shares above market value have seen changes that makes it taxable now for foreign investments also.

3.4 Tax Liabilities of Foreign Companies in India

Foreign companies that set up units in India are also liable to pay taxes as the IT Act of 1961 and GST rules. The following table gives details of the Taxes and Compliance requirements of Foreign Companies in India.

4. Additional Compliance

These include the laws pertaining to Environmental clearance, Data Privacy, and IP Protection.

4.1 Environmental Clearance

The regulations fall under various Acts including the Factories Act, 1948, Environment Protection Act, 1986, Water (Prevention and Control of Pollution) Act, 1974, Air (Prevention and Control of Pollution) Act, 1981, Hazardous Waste (Management, Handling and Transboundary Movement) Rules, 2016 and the Companies Act, 2013. Non-compliance with any of these rules will attract heavy fines, license suspension, and even closure of the unit.

4.2 Data Privacy

Companies must put in place measures to protect the data privacy of employees and customers. The Data Protection Act of 2013 and the IT Act of 2000 spells out the rules to this effect. Preventing unauthorized access, utilization, and unwanted disclosures can damage the reputation of the company and attract fines and legal proceedings.

4.3 IP Protection

The Patents Act, 1970, the Trademark Act of 1999,the Designs Act of 2000, and the Copyright Act of 1957 provide the rules for IP protection. These regulations safeguard inventions, trademarks, and designs and prevent plagiarism. Non-compliance leads to prosecution.

Ways to combat Non-compliance with all Statutory Compliance rules and regulations.

We recommend 3 ways to be compliant of all the Statutory Compliance rules and regulations.

1.  Stay Updated and Audit Regularly.

Stay updated on all changes that take place in the rules and regulations. Conduct regular Audits to check your compliance performance. Your updated compliance trends and reports will help you to ascertain your readiness to be compliant always.

2.   Prepare a “What to do List”.

Draw a list of the due dates applicable to all the Statutory Compliance rules and regulations and track the performance. Conduct team meetings to review the process to confirm the completion of your operation to stay compliant. Such a plan will help to optimize costs, save time, and prevent negative results.

3.   Hire Professionals

You can get the assistance of Professionals who will be able to keep you updated on all the changes and maintain full compliance. This may pose to be an additional expense for start-ups; you cannot ignore the fact that being non-compliant would be more expensive.

Conclusion

Navigating the Statutory Compliance rules and regulations can be a very challenging task given the complexities of the compliance laws. Outsourcing this critical task to an external agency is the ideal solution for start-ups. GetifyHR is one of t he leading outsourcers of Payroll Processing and Statutory Compliance and an association with us would ensure greater accuracy and full adherence to all the compliance requirements. By outsourcing Payroll Services, businesses can reduce the risks associated with non-compliance and continue to focus on their core business activities.

GetifyHR offers a comprehensive solution for Payroll Processing and Statutory Compliance. With years of experience in handling this process, we ensure that start-ups can navigate through this complex set of rules and regulations with ease. Companies can handle their core business activities with greater focus and peace of mind, once they are confident that a tried and tested expert partner is efficiently handling their payroll and statutory obligations.