Other BriefingsWhy Foreign SMEs Consider Payroll Outsourcing in India
Many SME companies in India, including foreign firms, are actively outsourcing their payroll services to ease the compliance burden and focus on core business growth goals.
In India, businesses often encounter difficulties in efficiently managing their workforce while also managing expenses. Compliance obligations and costs related to employees are significant concerns for them. However, digital solutions and seeking the services of professional employer organizations (PEOs) have allowed many companies to alleviate the burdens associated with human resources (HR) obligations and costs.
It’s no surprise then that the payroll outsourcing sector has experienced robust expansion in recent years. Based on expert projections, this market could grow from US$11.17 billion in 2023 to US$12.01 billion in 2024, at a compound annual growth rate (CAGR) of 7.5 percent. Some forecasts suggest that the market will reach US$16.12 billion by 2028.
According to a survey conducted by global consultancy Deloitte, a significant portion of companies worldwide, spanning North America, Latin America, EMEA (Europe, the Middle East, and Africa), and APAC (Asia-Pacific), choose to delegate their payroll management tasks to external vendors. This practice is also increasingly becoming prevalent in India as businesses seek to enhance the efficiency of their payroll operations.
Centralizing payroll operations and prioritizing strategic initiatives can help streamline record-keeping and ensure timely and accurate payroll processing for employees in India. When companies start hiring employees, they immediately face a multitude of obligations, such as compliance, salary distribution, and workers’ compensation insurance. While larger corporations usually assign these tasks to specialized HR departments, smaller or newer businesses may struggle to justify establishing formal HR structures. Outsourcing thus shifts the HR burden to specialized external entities equipped to handle various aspects of human resource management, including payroll administration, benefits management, and employee training.
Global outlook of payroll complexities and country-wise ranking
According to the 2023 Global Payroll Complexity Index (GPCI) report, France maintains its status as the most complex country for payroll processing, with Germany, Switzerland, Italy, and Canada following closely behind in the top five. The GPCI report highlights that the top 10 countries are 29 percent more complex than the remaining 30, with Canada, Turkey, the Netherlands, and Slovakia featuring in the top ranks while the United States drops to 14th place.
|
Payroll complexities countries |
Rank as of 2023 |
Rank as of 2021 |
|
France |
1 |
1 |
|
Germany |
2 |
4 |
|
Switzerland |
3 |
8 |
|
Italy |
4 |
2 |
|
Canada |
5 |
30 |
|
Poland |
6 |
6 |
|
Turkey |
7 |
36 |
|
Netherlands |
8 |
16 |
|
Belgium |
9 |
3 |
|
Slovakia |
10 |
26 |
|
Australia |
11 |
21 |
|
China |
12 |
14 |
|
Sweden |
13 |
17 |
|
United States |
14 |
10 |
|
Spain |
15 |
5 |
|
Luxembourg |
16 |
– |
|
Denmark |
17 |
12 |
|
Finland |
18 |
20 |
|
Ireland |
19 |
33 |
|
Czech Republic |
20 |
27 |
|
India |
21 |
25 |
|
Austria |
22 |
18 |
|
United Kingdom |
23 |
31 |
|
Philippines |
24 |
37 |
|
Brazil |
25 |
19 |
|
Portugal |
26 |
– |
|
Slovenia |
27 |
– |
|
Russia |
28 |
7 |
|
New Zealand |
29 |
32 |
|
Malaysia |
30 |
29 |
|
Singapore |
31 |
38 |
|
Hungary |
32 |
– |
|
United Arab Emirates |
33 |
40 |
|
Romania |
34 |
22 |
|
Mexico |
35 |
15 |
|
South Korea |
36 |
24 |
|
Argentina |
37 |
23 |
|
Japan |
38 |
9 |
|
Hong Kong |
39 |
39 |
|
Saudi Arabia |
40 |
– |
Despite recent simplifications in the U.S., challenges persist, particularly in scenarios involving employment across multiple states. Notably, nine out of the top 10 countries for payroll complexity are situated in Europe.
Summary findings of the 2023 GPCI report on payroll complexities
- France remains the most complex country for payroll processing, with a complexity score of 7.96 out of 10, showing a 10 percent increase in complexity since 2021.
- India’s ranking in payroll complexity rose to 21 in 2023 from 25 in 2021, signaling an increase in the obligations linked to payroll processing in recent years.
- Saudi Arabia emerges as the least complex country among the 40 ranked, reflecting its debut on the index, possibly due to the rise in international businesses setting up operations there, necessitating alignment with global payroll regulations.
- Some European nations like Austria, Hungary, and Poland require a blend of manual and digital payroll processing, increasing complexity and the potential for errors.
- Turkey experiences the second-highest increase in complexity with a 30 percent rise, while the United Arab Emirates sees the highest increase at 50 percent.
- Overall, from 2021 to 2023, there’s a slight decrease of 6 percent in payroll complexity.
- The top 10 countries are 29 percent more complicated than the remaining 30, with mandatory deductions, social security calculations, and compulsory reporting types being the primary complexity drivers.
- Payroll complexity varies by 91 percent from the most to the least complex country.
- Agile and automated payroll solutions are crucial for streamlining processes and ensuring compliance with evolving regulations.
- Navigating the complexities of payroll in various countries requires embracing innovation, expertise, and tailored solutions to address unique challenges posed by governmental and social structures.
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Why foreign companies prefer outsourcing payroll services in India
Given its status as one of the fastest-growing economies in the world, there’s a pressing need for India to simplify its payroll compliance procedures. For foreign companies operating in India, grappling with the intricate and ever-changing payroll regulations and requirements can be challenging and confusing, consuming valuable time and resources that could otherwise be directed towards business growth. Outsourcing payroll services presents a transformative solution in this scenario.
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In-house payroll management entails meticulous attention to detail, from tax calculations to timely paycheck issuance, all while keeping abreast of dynamic Indian laws and regulations. Outsourcing payroll services to proficient professionals allows international companies to streamline their payroll and HR operations, liberating resources for core business functions.
Various types of businesses stand to benefit from outsourcing payroll processing:
- Small and medium-sized enterprises (SMEs) with constrained budgets: Limited resources and budgets may hinder SMEs from establishing independent, in-house payroll departments. Outsourcing tedious payroll tasks to skilled professionals can result in substantial cost and time savings.
- SMEs seeking access to digital solutions: Access to sophisticated payroll automation software, typically beyond the budget of SMEs for in-house implementation, is facilitated through outsourcing payroll processing. This may also subsidize access to technology solutions for cross-department, multi-functional management processes, which can be bundled in the services package of external vendors.
- Rapidly expanding companies: Companies experiencing rapid growth may face time and resource constraints in managing payroll. Outsourcing allows them to focus on core business objectives while ensuring accurate and efficient payroll management.
Key functional advantages of payroll outsourcing
1. Enhanced compliance with local employment and tax laws: Outsourcing to local experts ensures adherence to regulations, keeping businesses updated on changes without significant resource investment.
2. Streamlined HR function: Simplifying the workload of the HR department enables a focus on strategic issues and employee relations, reducing costs associated with administrative tasks.
3. Overcoming cultural and communication barriers: Language and cultural differences pose challenges for foreign companies in India. Partnering with a payroll provider possessing local expertise facilitates compliance and provides real-time support, addressing cultural nuances effectively.
4. Maintaining confidentiality and transparency: Outsourcing payroll accounting mitigates the risk of sensitive data breaches, ensuring confidentiality and limiting access to payroll details to authorized personnel. Partnering with a reliable provider ensures data security compliance through secure solutions.
Payroll compliances in India
Every country has its own set of payroll laws, and for business owners operating in that country, compliance is a must. In India, a company may have to adhere to different labor laws and compliances based on the nature of operations and the industry.
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The registration processes with central government authorities entail:
1. Obtaining a Permanent Account Number (PAN) – necessary for tax filing and corporate tax return submissions.
2. Acquiring a Tax Account Number (TAN) – required for withholding income tax at the source.
3. Enrolling with the Employee Provident Fund (EPF) and Employee Pension Scheme (EPS) – compulsory for companies employing more than 20 individuals.
At the state level, payroll-related registration processes include:
1. Enrollment for Profession Tax – if applicable in the specific state.
2. Registration for Employee State Insurance (ESI) – mandatory for companies with a staff of over 10 members.
3. Registration with the Labor Welfare Fund – if applicable in the specific state.
Statutory Compliance in Payroll in India
|
Social security |
Employee salaries and benefits |
Industrial relations |
Tax liabilities |
|
The Employee’s Provident Fund and Miscellanous Act, 1952 Labour Welfare Fund Act, 1965 Employee State Insurance Act, 1948 The Payment of Gratuity Act,1972 |
Payment of Wages Act, 1932 Minimum Wages Act, 1948 Payment of Bonus Act, 1965 Maternity Benefit Act, 1961 |
Employee Provident Fund Act, 1952 Payment of Gratuity Act Labour Welfare Fund Act Employee State Insurance Act |
Tax Deducted at Source (TDS) |
Understanding functional obligations under payroll management
Compensation, commonly known as payroll, denotes the financial remuneration a company disburses to its workforce for their rendered services. Typically managed by the accounting or human resources department, especially in larger organizations, smaller businesses might have owners or entrepreneurs handle these tasks themselves.
- Creating organizational policies such as the pay policy, which includes guidelines for leave encashment, flexible benefits, etc.
- Specifying elements on the pay slip, such as basic pay, variable pay, LTA, and HRA.
- Incorporating additional payroll inputs like meal allowances, among others.
- Performing the calculation of gross salary, both statutory and non-statutory deductions, to determine the net pay.
- Disbursing employee salaries.
- Submitting obligations such as TDS, PF, etc., to relevant authorities and completing necessary filings.
In essence, payroll encompasses the roster of employees within a company. This involves tracking hours worked, calculating compensation, and disbursing payments via checks or direct deposits. Alternatively, businesses can opt for cloud-based software or professional services to manage payroll if they prefer not to handle it internally.
Increasingly, companies are outsourcing payroll processing to specialized firms that also manage tasks like insurance, employee benefits, and tax withholding. Fintech companies are leveraging technology to streamline these processes, offering faster and more convenient payroll processing, which is particularly beneficial in gig and outsourcing economies.
When establishing their local payroll operations in India, businesses must undergo various registration procedures with tax and social security authorities at both the national and state levels.
Wage Code implementation awaited
Four new labor codes in India have been passed by parliament but await the release of implementation regulations across Indian states. Labor is a concurrent subject in the Indian constitution – the federal law provides a model framework, but state governments must issue implementing guidelines. The new labor codes seek to stablish equitable labor practices and safeguard the rights of both employers and employees, striking a balance between employee welfare and the facilitation of business operations in India.
Once implemented, the four labor codes will consolidate 29 existing labor statutes, representing a long-awaited reform effort. While certain provisions of the Code on Wages, 2019 (such as those pertaining to the central advisory board on minimum wages) and the Code on Social Security, 2020 (concerning the identification of employees and beneficiaries for statutory benefits using Aadhar Card) have already been notified and implemented by the Central government, the effective date for the implementation of substantive provisions of the new labor codes is pending.
Companies in India need to prepare to meet the changes in compliance to HR and payroll norms under these codes.
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India Briefing is one of five regional publications under the Asia Briefing brand. It is supported by Dezan Shira & Associates, a pan-Asia, multi-disciplinary professional services firm that assists foreign investors throughout Asia, including through offices in Delhi, Mumbai, and Bengaluru in India. Readers may write to india@dezshira.com for support on doing business in India. For a complimentary subscription to India Briefing’s content products, please click here.
Dezan Shira & Associates also maintains offices or has alliance partners assisting foreign investors in China, Hong Kong SAR, Dubai (UAE), Indonesia, Singapore, Vietnam, Philippines, Malaysia, Thailand, Bangladesh, Italy, Germany, the United States, and Australia.
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