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The Importance of Payroll Confidentiality in India

By Nishant Maddineni
Posted: 21st May 2015 09:07
Payroll confidentiality is difficult to maintain in Indian workplaces. As in most countries, well-managed companies take extra care to make sure the payroll information of their employees is confidential. In India, however, there are additional challenges for multinational businesses attempting to maintain payroll confidentiality. Payroll support services have consequently become a business-critical function for many small and medium sized enterprises (SMEs) in India.

Cultural Considerations

For SMEs investing in India for the first time, there are some aspects of Indian workplace culture that make payroll confidentiality more important, and more difficult, than it is in Western countries.

Employees in India are generally more open about sharing salary and expense details than they are in the West. It is not uncommon for Indians to ask colleagues personal financial questions that are sometimes seen as intrusive by Westerners. Meanwhile, many Indians place a greater emphasis on hierarchy in the workplace than Westerners. In the Indian workplace, this can mean that employees expect salary differences to reflect seniority or years of experience rather than soft skills, technical expertise or performance.

Companies that employ foreign nationals in India have other important payroll considerations. To obtain an employment visa, foreign nationals must earn over US$25,000 annually. This figure is above the average white-collar salary for local employees, while most companies go beyond this with more lucrative ‘expat packages’ designed to encourage foreigners to stay in India. In small offices, where responsibilities are shared between local and foreign staff, an absence of payroll confidentiality can create tension between staff members.

Businesses can construct employment contracts, human resource policies and training as well as payroll systems to help mitigate some of these challenges. However, when a local office manages most of these functions, it can become difficult for foreign-based headquarters to ensure compliance over the long-term. If payroll confidentiality is compromised, foreign-based managers are often hard-pressed to maintain employee engagement and motivation across their India-based workforce.

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Tax and Legal Liabilities

Many companies create a separate department for payroll, while others make it part of their human resources department. However, these two methods are often inefficient and can lead to costly, time-consuming and unnecessary errors. SMEs in particular may not have the time or capability to administer payroll across multiple time zones. These operational concerns alone motivate many multinational businesses to outsource payroll for international offices; however, there remain important compliances that further complicate payroll processing in India.

Payroll for India-based staff can be especially difficult because it requires administrators to comply with India’s challenging tax laws. The sometimes fluid nature of India’s regulatory environment requires administrators to adopt payroll procedures and systems that are flexible enough to allow for new compensation structures. Failure to comply with tax laws or new payroll regulations can invite unwanted attention from the authorities, while unanticipated changes to salary structures can demotivate and alienate staff.

Employers must also comply with laws designed to ensure employee data protection and privacy. In India, the Information Technology Act, 2000 (IT Act) requires employers to ensure the protection of employees’ personal data and information from unlawful disclosures. This is partly met by complying with the Act’s requirement for employers to maintain a well-documented privacy policy.

However, if an employer is negligent in maintaining “reasonable security practices and procedures” for protecting an employee’s Sensitive Personal Data or Information (SPDI), and this negligence results in “wrongful loss or wrongful gain”, the employer is liable to pay compensation to the relevant employee. The employee can approach an adjudicating officer appointed under the IT Act to claim up to Rs. 5 crore (US$792,000) in compensation or go to a civil court if the employee is seeking more than Rs. 5 crore in compensation.

Many foreign companies outsource payroll functions for India-based staff because of these liabilities. If a company outsources payroll services, the payroll service provider assumes many of the responsibilities associated with Indian tax and law compliance. Beyond this, payroll providers can advise junior accountants and foreign-based financial administration teams on complex salary issues and best practices in India. Accordingly, payroll support services have increasingly become an important component of foreign companies’ India operations.

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Best Practices

Businesses that outsource payroll take an important first step towards creating a culture of confidentiality in the office place. The trickledown effect goes beyond payroll: employers that outsource payroll maintain the confidentiality of employees’ financial and personal information, but also help create a professional atmosphere where employees value confidentiality, which can in turn improve service provision.

Businesses that outsource payroll keep employees’ salary details limited to a small number of senior staff and the payroll service provider. The service provider will maintain critical information – such as employees’ salary structure, social security contribution, professional tax payable and tax deducted at the source – that is important for both salary payments and tax compliance. Service providers also collect ad-hoc information on overtime hours, bonuses and any allowances for employees. In addition, payroll providers can produce bank transfer files, printed and online pay slips as well as tax files for employers.

This support allows employers to focus on their core business. Although payroll administration is often an afterthought for businesses, establishing a trusted system for Indian workforces helps businesses manage important human resource challenges.
This article was first published onIndia Briefing.

Since its establishment in 1992, Dezan Shira & Associates has been guiding foreign clients through Asia’s complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll and audit matters. As a full-service consultancy with operational offices across China, Hong Kong, India and emerging ASEAN, we are your reliable partner for business expansion in this region and beyond.

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