By Jignesh Thakkar & Lakshmi Rangarajan, Respectively leader, global compliance solutions and partner, risk consulting, EY India
In recent years, the Indian government has undertaken various initiatives aimed at reducing the compliance burden on industries and commercial establishments. However, the current landscape reveals a staggering reality—companies operating across all states in India face over 20,000 compliance obligations at both central and state levels. Alarmingly, labour regulations constitute nearly 56% of this overall compliance burden.
A major overhaul of the compliance framework was anticipated with the consolidation of 29 existing laws into four comprehensive labour codes (LCs). However, as these await implementation, questions arise regarding their effectiveness in alleviating the compliance burden on employers and aligning India with international labour law standards. Current LCs face several key challenges:
Increased cost of doing business: The redefined wage structure, which caps wages at 50% of total compensation, directly impacts salary components such as performance-linked allowances and variable pay. This could lead to increased social security contributions, raising employment costs by around 5-10%. Also, the introduction of centrally defined but regionally adjustable minimum wages complicates wage management for employers with multi-state operations.
Uncertainty in regulatory environment: The varying definitions of ”worker” and “employee” significantly impact eligibility for benefits and protections. This persistent issue remains inadequately addressed in LCs and fails to align with contemporary industry needs. For example, in the IT and IT-enabled services (ITeS) sector, many individuals earning over Rs 12 lakh per annum may still be classified as workers.
This classification can trigger stringent compliance requirements that contradict the goal of reducing the compliance burden. In contrast, many developed nations such as the US have exempted highly compensated employees in executive, administrative, and professional roles from certain working time regulations. This discrepancy highlights the need for regulatory frameworks that better reflect the realities of modern employment.
Overlap with state laws: While the LCs aim to subsume 29 central laws, state-specific Shops and Establishments Acts will continue to apply, creating a dual compliance framework for small and even large employers in sectors like technology and retail. This overlap complicates alignment with both central and state-level regulations regarding registrations, work hours, leave policies, and other working conditions.
Inconsistent compliance requirements: The lack of uniformity in compliance obligations related to record maintenance, filing, and display requirements creates a complex landscape for businesses operating across multiple states, potentially leading to confusion and increased administrative costs.
Varying levels of digitisation: As states retain jurisdiction over labour code enforcement, differing levels of digitisation and varying formats for compliance requests result in redundancies and inefficiencies. For example, employers in Maharashtra may face a significantly higher number of compliance forms compared to those in Hyderabad.
Given that India’s micro, small, and medium enterprises contribute approximately 30% to GDP, account for 45% of manufacturing output, and employ over 110 million people, the expanded regulatory framework poses considerable challenges. The complexity of labour law requirements may deter global companies from investing in India or lead them to focus on select states, undermining the potential for operational efficiency and talent access in other states.
To address these challenges, the government should consider implementing the following initiatives:
Clarifying key definitions: Contemporary classification methodologies that align with international labour standards should be introduced, incorporating salary and job role-based classifications. Further, clarification on wage definition would also assist companies in planning compensation models and estimate cost of resources.
Subsuming Shops and Establishment laws: State-specific Shops & Establishment Acts should be integrated into the proposed LCs, which will address the issue of dual-compliances. Rationalising applicability thresholds: Sector-specific exemptions and regulations should be introduced to streamline compliance.
Additionally, compliance requirements should be standardised to reduce redundancy; tailored compliance forms relevant to specific industries should be developed to enhance efficiency; and a self-certification scheme for certain compliance requirements should be implemented, which can potentially reduce the compliance burden by 15-20%.
If these recommendations are effectively and timely implemented, India could optimise compliance burdens and litigations by nearly 50% in the labour laws alone. This would significantly impact the overall cost of doing business and promote investments in key sectors by creating a consistent and simplified compliance framework across all states.
Thus, while the government has made strides toward easing compliance burdens, a comprehensive re-evaluation of the regulatory framework is essential. By addressing the current challenges and implementing targeted initiatives, India can enhance its business environment, attract global investments, and foster sustainable economic growth.