An International Employer’s Guide to Ensure Payroll Compliance in India

Introduction to Payroll Processing Checklist

Non-compliance with global payroll requirements is a critical issue that growth-minded companies simply cannot afford to ignore. The business landscape is increasingly global, making it essential for companies to adopt a robust payroll process that adheres to international regulations.

Risks of Inadequate Global Payroll Implementation

The implementation of global payroll requires a keen understanding of various elements such as employment laws, tax withholdings, and business classifications, which can differ greatly from one country to another. A flawed approach to this can result in several repercussions:

Limited Growth Prospects

An ineffective payroll process can severely limit a company's ability to scale and take advantage of global business opportunities. In worst-case scenarios, payroll complexities become the bottleneck in the company's expansion strategy.

Increased Risk

Non-compliance with labor laws and tax regulations opens the door to significant risks, including fines and legal actions. Such non-compliance can also lead to the unauthorized disclosure of sensitive employee information, putting the company’s reputation and legal standing at jeopardy.

Higher Costs and Lower Profits

If a business does not standardize its international payroll systems or relies on multiple in-country payroll providers, the result is often increased operational costs. These inefficiencies can negatively impact the company's bottom line and its ability to turn international investments into profits.

Loss of Talent

Poorly managed payroll processes also affect the employee experience. Failure to pay international workers correctly or in a timely manner can result in talent attrition, thereby diminishing the company's ability to attract and retain high-quality employees.

Global Compliance Checklist: A Solution

Understanding the gravity of these issues, we have created a comprehensive global compliance checklist. This checklist aims to guide companies through the intricate maze of international payroll processing, thereby ensuring compliance and operational efficiency.

Disclaimer

Please note that this global compliance checklist is intended for informational use only and should not be construed as legal, business, or tax advice. We strongly recommend consulting with legal professionals from Wisemonk for specific guidance tailored to your company’s needs.

By giving due attention to each of these aspects, businesses can not only ensure compliance but also streamline their global payroll processes, thereby enabling seamless international expansion and operations.

What is Global Payroll?

Global payroll is the comprehensive system that enables companies to manage the payroll process for their entire international workforce, irrespective of geographical location or employment status. It is a critical aspect of business operations that extends beyond the borders of a single country, incorporating various components that differ from domestic payroll. Here’s a breakdown of what global payroll involves:

Calculating Employee Wages

One of the fundamental steps in global payroll processing is the calculation of gross pay for each employee based on their respective salary agreements or hourly rates. This involves considering various factors like hours worked, overtime, and any additional payments or allowances that might be applicable.

Withholding Taxes

A complex but essential part of global payroll involves withholding the appropriate amount of taxes based on local tax regulations in the employee's country of residence. This can include federal income tax, social security contributions, and any other tax withholdings specific to the jurisdiction.

Administering Benefits and Bonuses

Beyond the basic pay, the payroll process also encompasses the administration of employee benefits such as healthcare, retirement funds, and other perks. In some instances, bonuses may also be distributed through the payroll system, and these must comply with local laws and tax implications.

Delivering Payments to Employees

Another critical aspect of the global payroll process is ensuring timely and accurate payments to employees stationed in different countries. Payment methods can vary depending on local preferences and regulations, ranging from direct deposit to manual payroll disbursements.

Tracking Employees’ Working Hours and Paid Time Off

Accurate records of employees’ hours worked and accrued unused vacation or paid time off are vital in global payroll. Such records enable the company to comply with local labor laws, which can dictate overtime rates and mandatory leave benefits.

Maintaining Payroll Records

Companies are obliged to maintain comprehensive payroll records that include payment history, tax withholdings, and benefits administered. These records must be well-organized and securely stored to comply with data protection laws and for potential audits.

Providing Payslips to Employees Overseas

Employees have the right to a transparent account of their earnings and deductions. Consequently, the payroll process often involves the creation and distribution of detailed pay stubs to workers, which is especially crucial for those stationed overseas.

Protecting and Organizing Employee Data

The secure storage and organization of sensitive employee information are paramount. This includes social security numbers, banking details, and personal contact information. Proper data management safeguards against unauthorized access and ensures compliance with international data protection regulations.

Understanding and effectively managing each of these components are critical for businesses looking to standardize their global payroll processes. Doing so not only ensures compliance with international laws but also contributes to operational efficiency and employee satisfaction.

Comprehensive Steps to Manage Global Payroll

Step #1: Establishing Your Own Entity in India

A company might opt to set up its own entity in India under circumstances where it foresees a substantial long-term presence and significant operational scale in the country. This approach is typically favored by organizations intending to establish a large dedicated office, a manufacturing plant, or if they plan to have a direct sales presence and substantial market penetration. By creating an entity, these companies can:

• Exercise complete control over their operations and workforce.
• Protect their intellectual property and business methods within a controlled legal structure.
• Ensure full revenue retention within the country, which could be advantageous for reinvestment and tax purposes.
• Have the presence to engage in government contracts or comply with specific regulatory requirements that necessitate a local entity.

In India, you need to have a recognized legal company registered with the Ministry of Corporate Affairs in order to pay employees. This is a multi-step procedure that will involve the following:

1. Submitting an online application to obtain a Director Identification Number (DIN)
2. Name of reserved company
3. Cover stamp costs.
4. Apply a seal.
5. Visit a government agency in person to receive a Permanent Account Number.
6. Obtain a number for your taxes.
7. Register with the staff member. Provident Fund Company
8. Register for the Employees' State Insurance Scheme if you are an employer with ten or more employees.

Step #2: Establish your Payroll Process

Once you've decided on the employment structure—the next step is selecting a global payroll software solution that fits your business needs managing payroll complexities that come with international employment, ensuring accuracy, compliance, and timeliness in your payroll processes.

Key Considerations for Choosing Payroll Software:

• Integration with Local Systems: Your payroll solution should seamlessly integrate with India's banking systems and tax protocols. It should handle local statutory deductions, like Provident Fund (PF), Employee State Insurance (ESI), Professional Tax (PT), and Labor Welfare Fund (LWF) contributions, among others.
• Compliance Management: Ensure the software stays current with India’s tax laws and employment regulations. It should automatically update to reflect any changes in legislation, thus keeping your payroll compliant without manual intervention.
• Currency and Exchange Rate Management: Given the need to pay in Indian Rupees (INR), the payroll software must handle currency conversions and protect against exchange rate fluctuations.
• Scalability: Choose software that can scale with your business. As your workforce in India grows, your software should be able to accommodate increased complexity and additional employees without a drop in performance.
• Data Security: Payroll data is sensitive, and the software must have robust security measures in place to protect against breaches and ensure data privacy.

You should also have policies on the following to guarantee that your business handles payroll in India efficiently:

1. Benefits: How do you send payments and what perks are necessary?
2. Leaves: Which leaves, if any, must be paid for in whole or at a reduced rate?
3. Overtime: How much and at what rate do you have to pay employees for overtime?
4. Absences: How do you keep track of absences and determine if they are paid, unpaid, or excused?
5. Holidays: Which holidays carry pay, and how much is paid?

Step #3: Determine Your Workers’ Employment Status

It determines the type of employment contracts you need, the benefits you must provide, the taxes you are liable to withhold, and the overall compliance with Indian labor laws. 

Conditions of employment

In India, each employee needs to be covered by a collective bargaining agreement or have an employment contract. What has to be in this paper is as follows:

1. Full name and address of the company
2. Full name and address of the employee
3. Date of hire Start of Work Relationship Type
4. Hours of work
5. Calculation rate and frequency of pay
6. If a contract has a set duration, it must specify when it ends.
7. Process of termination

Classification of Employment Status

In India, there are severe penalties for misclassification. Businesses risk penalties, back pay, and exclusion from doing business in India.

• Full-Time Employees: They have the most comprehensive legal protection and benefits, including health insurance, pension plans, and severance. Employers must adhere to strict compliance regarding their working hours, overtime, and termination.

• Part-Time Employees: While they are entitled to many of the same protections as full-time employees, their benefits are often proportional to their working hours.

• Contract Employees: Hired for a specific duration or project, contract employees' rights are governed by the terms of the contract and the relevant Indian labor laws. They typically do not receive the full range of benefits.

• Freelancers/Consultants: Usually self-employed individuals, they do not enjoy the benefits and protections afforded to employees but have greater flexibility. Employers are not typically responsible for withholding taxes for freelancers, who are instead responsible for paying their own advance tax.

Implications for Payroll

The employment status affects payroll processing in several ways:

• Tax Withholding: Different employment categories are subject to varying tax withholding requirements. Full-time employees, for instance, are subject to Tax Deducted at Source (TDS), which employers must handle
• Benefits Contributions: Statutory benefits like Provident Fund (PF) and Employee State Insurance (ESI) contributions apply to full-time employees, impacting payroll calculations
• Regulatory Compliance: Compliance with the Shops and Establishments Act, the Professional Tax, and the Labor Welfare Fund depends on employment status.
• Record Keeping: The type of employment influences the records you must maintain. For full-time employees, this includes detailed attendance, leave records, and more.

Step #4: Capture Your New Hires’ Indian Payroll Information

This step is critical to ensure accurate and timely payroll processing and to remain compliant with Indian tax and employment laws.

Information Required for Indian Payroll:

1. Personal Details:

• Full name as per official records
• Date of Birth
• Current address and permanent address
• Contact information (phone number and email address)
• Emergency contact details

2. Tax Information:

• Permanent Account Number (PAN), which is mandatory for all employees working in India to facilitate tax deductions
• Aadhaar Card number for Indian residents
• Details of any other income (if applicable) for accurate tax calculation

3. Banking Information:

• Bank account details where salary will be deposited, including the name of the bank, account number, branch details, and IFSC code

4. Employment History:

• Previous employment details
• Last drawn salary
• Form 16 from the previous employer (if applicable) for TDS reconciliation

5. Work Eligibility Documents:

• Visa, work permit, or OCI (Overseas Citizenship of India) details for non-Indian residents

Step #5: International Payment Considerations You Need to Make

Currency and Exchange Rates

Given the volatility in the foreign exchange markets, it's important to approach this with a strategy to mitigate financial risk and ensure the timely and correct payment of salaries.

Payment in Local Currency (INR) and Exchange Rates

• Employees in India must be paid in Indian Rupees (INR), which necessitates currency conversion for the U.S.-based companies.
• Companies should monitor FX ratesthese rates closely or engage with a service that provides this facility, as even minor fluctuations can have a significant impact on the amount received by employees after conversion.
• To avoid exchange rate losses, it's advisable to convert currency at a time when the rates are favorable. Some companies opt to use forward contracts or other financial instruments to lock in an exchange rate for a future date, thus ensuring budget stability.

Regulatory Compliance:

• Companies must comply with the Foreign Exchange Management Act (FEMA) in India, which governs cross-border money transfers.
• Employers must also ensure that all international payments are reported accurately to the relevant tax authorities.

Reliable Payment Gateways:

• Utilizing trusted international payment gateways can ensure secure and efficient transactions.
• The chosen payment system should have a strong track record of successfully dealing with international payroll requirements.

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Wisemonk is highly optimised as it allows for unlimited international payments to contractors at Industry lowest FX markup (<0.6%)

Example- Let’s say you have a team size of 2 employees in India and the average salary per employee is 30,000 USD. 

Total amount of salary to be disbursed- 2 x 3,0000 = 60,000 USD

If your chosen EOR provides a 3% markup on foreign exchange, that amount will be 1800 USD,Whereas with Wismonk’s FX markup of 0.6%, the additional amount the company has to pay will just be 360 USD.

In this way Wisemonk provides value to the company by saving almost 150 USD per month for a company with a team size of 2 in India.

Step #6: Calculate and Run Payroll

TDS (Tax Deducted at Source):

Payroll taxes are something you'll need to factor in when estimating your Indian payroll. If you fail to comply with these, you may face expensive fines and penalties from Indian government organizations.

Old Tax Regime:

• Under the old tax regime, taxpayers can avail of a wide range of deductions and exemptions such as the standard deduction, house rent allowance, deductions under Section 80C for investments, etc.
• The tax rates under this regime are progressive, with slabs ranging from 5% to 30%, depending on the individual's income level.

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New Tax Regime (Introduced in Budget 2020):

• The new tax regime offers reduced tax rates but comes with a catch – the taxpayer has to forgo most deductions and exemptions available under the old regime.
• Tax rates under this structure range from 5% to 30%, but the slabs are adjusted so that many individuals might fall into lower tax brackets than they would under the old regime.

The idea is to simplify the tax system by eliminating the myriad of exemptions and deductions while offering lower rates.

Pay Employees

For companies with a limited presence in India — perhaps a few employees — partnering with a local payroll provider could be the most efficient approach. These providers are well-versed in the nuances of India's payroll regulations, saving your business from the complexities of legal compliance and potential pitfalls.

On the flip side, if your business footprint is larger, or if you're eyeing substantial growth in the Indian market, setting up an in-house payroll could be advantageous. This requires a dedicated effort to understand and apply Indian payroll laws accurately, ensuring the correct withholdings and tax remittances to the appropriate Indian tax authorities.

Regardless of the chosen method, the underlying principle is precision — accurate payroll processing that reflects the latest legal requirements, ensuring employees receive their rightful pay and the company remains compliant with Indian tax laws.

Step #7: Record and Archive Your Records of Payroll

After employment ends, payroll records in India must be retained for a minimum of three years. At the very least, your payroll records ought to contain:

1. The duration of work and the salary scale
2. The regularity of payments
3. Deductions
4. Name and address of the employee
5. Total compensation, including overtime
6. Employee net payment
7. A copy of the collective bargaining agreement or employment contract that was taken

Decide whether or not to create your own entity in India or use an Employer of Record (EOR)

When expanding your U.S.-based company's operations to India and planning to hire local talent, a key initial decision is whether to establish a legal entity in India or partner with an Employer of Record (EOR). This step is crucial, as it sets the foundation for your international employment structure and payroll process.

Why the need to outsource Global Payroll?

Here are the top 5 reasons why companies should look at outsourcing payroll as they expand their business internationally.

1. Expertise in Local Compliance: Managing payroll across multiple countries requires a deep understanding of diverse tax laws, labor regulations, and reporting requirements. Outsourcing global payroll to specialized providers ensures that experienced professionals handle these complexities, reducing the risk of non-compliance and associated penalties.
2. Cost Savings: Operating an in-house global payroll department can be a costly affair, requiring substantial investments in technology, training, and manpower. Outsourcing allows employers to convert fixed payroll costs into variable expenses, paying only for the services they need. This cost-effective approach can lead to significant savings and better budget predictability.
3. Improved Efficiency and Accuracy: Global payroll providers leverage advanced payroll systems and automation tools to streamline processes, minimizing manual errors and reducing the time spent on administrative tasks. This improved efficiency not only enhances accuracy but also frees up HR and finance teams to focus on strategic business initiatives.
4. Access to Advanced Technology: Reputable global payroll outsourcing companies invest in cutting-edge payroll technology, which may be costly for many businesses to implement in-house. By outsourcing, employers can benefit from the latest payroll systems, ensuring efficient data management, secure processing, and real-time reporting.
5. Scalability and Flexibility: As businesses expand into new international markets or experience fluctuations in workforce size, payroll needs may change rapidly. Outsourcing global payroll offers the flexibility to scale services up or down as required, adapting to business growth or contraction without the burden of significant adjustments to an in-house payroll infrastructure.

Understanding Your Business Needs and Objectives

Before you start searching for the "Best Global Payroll Service Provider" on Google or Bing, it's essential to have a clear understanding of what you want to outsource. Ask yourself important questions, such as

• Do you need the provider to handle salary processing, payroll compliance, or something else? Define the specific services you require from the partner. 
• Should the solution be applicable to contractors only or extend to full-time employees? 
• Does the company already have entities in the countries where you plan to outsource the global payroll?
• What is your budget for outsourcing payroll services? How will this investment benefit the company?

By answering these questions, you'll focus your search and make it easier to find the ideal service provider. Let's understand some of the payroll service providers available in the market through this comparison table.

Using an Employer of Record (EOR) Service

An EOR is especially advantageous for mid to large-sized U.S.-based companies or early-stage startups that have identified potential talent in India and wish to onboard them efficiently and compliantly. It's a solution that mitigates the need for extensive local knowledge of legal and tax intricacies, allowing the company to focus on its core competencies while the EOR handles the rest.

Partnering with an EOR is a strategic choice for companies that:

1. Aim to quickly onboard talent without the delay of setting up a legal entity.
2. Want to test the Indian market with a lower risk and investment before committing to a full-scale operation.
3. Prefer to minimize the administrative overhead associated with legal compliance, payroll, and human resources.
4. Require flexibility to scale their workforce up or down without the complexities of hiring and termination laws in India.
5. Seek to ensure compliance with India’s employment laws and tax codes, which can be complex and vary significantly from U.S. practices.

The decision between establishing an entity or using an EOR service is influenced by the company’s commitment level, need for control, risk appetite, and speed of market entry. An EOR like Wisemonk can expertly navigate these complexities. By accurately determining the employment status, an EOR ensures that the payroll process adheres to all local regulations, calculating appropriate tax and benefits contributions, and maintaining necessary records. Those leaning towards an EOR appreciate the swift, flexible, and compliant nature of the service, which can be particularly crucial in the dynamic and competitive Indian market.

Read our blog on Best Employer of Record (EOR) Services in India [2023].

Bottom Line: Wisemonk

Wisemonk is the most value focussed strategic partner for your company in global talent acquisition and management. It offers a more affordable solution compared to other options, including setting up your own entity. Wisemonk’s transparent pricing starting at just $150 per employee per month makes them accessible for even small to medium-sized businesses while providing a range of features usually reserved for high-ticket EORs.

Besides cost-effectiveness, Wisemonk also excels in providing localized expertise. Being native to India, the founders understand the Indian market intricately, allowing them to offer tailor-made solutions that can be a huge asset for U.S.-based companies looking to hire in India

Leave the hassle of entity establishment and focus on what you do best—running your business. Reach out to us, and we will be happy to assist you.