India has always been one of the most ambitious countries with it’s ‘Make in India initiative’. India is also ranked 142 out of 190 countries in the world when it comes to ease of doing business operations according to 2014, the World Bank’s Ease of Doing Business Index.
The country is still struggling with the complex compliance requirement which makes it challenging for businesses to operate without getting into some type of legal issues.
In this blog, we will take a look at the compliance issues to gain a better understanding. We will also look at some of the ways that can help companies to mitigate common compliance risks and indulge in better risk management and it is best to start with the basics.
What are Compliance Issues?
Compliance issues are situations where organizations or individuals fail to follow the rules and regulations that a business established in India is supposed to follow. These issues can be in various domains such as finance, taxes, data safety as well as health guidelines.
What is Compliance Risk?
Compliance risk refers to the consequences that the company might face if the company fails to comply with the various laws and regulations that are supposed to be followed. The consequences and most common compliance risks might include legal penalties or regulatory action.
Corporate compliance or regulatory compliance is simply a set of rules and regulations such as privacy laws, and occupational safety that a business has to follow in a timely manner. These set of standards are set to ensure ethical practices in business to make certain that everyone is treated fairly, and avoid environmental damage.
Importance of Compliance in Business
India has numerous laws and regulations to ensure that every person, entity, associates, and all the stakeholders of the business gets fair treatment. In addition to that, there are laws and regulations to ensure business operations and services are not harming people, privacy, the environment, natural resources, occupational safety, health, and much more.
It’s one of the crucial responsibilities of the business to ensure regulatory compliance by following all the guidelines mandated by the regulatory bodies. Failing to keep up with the regulatory environment and finding itself in a situation of non-compliance costs business much more than legal penalties and the potential losses from lawsuits.
There is a loss of trust in the market if a company gets a reputation that it does not follow ethical practices. Building that trust again takes a significant amount of time and effort. Meanwhile, companies might suffer massive losses if they fail to mend that trust with the vendors.
The failure to keep up with compliance also has major financial risks attached to it. These can be hefty penalties or costly lawsuits for an organization. The reputation damage that comes along with the legal penalties and regulatory actions also affects your customers. It damages the brand image and often leads to a major reduction in the market share.
If you do not follow legal compliance related to employment such as a healthy work environment and minimum wages, it is likely to cause a lack of employee loyalty, higher turnover, lower productivity, and higher recruitment costs. That makes it essential to process risks strictly & follow compliance policies.
Essential Acts and Regulations for Compliance in India
There are many acts and regulations that a company needs to comply with but let’s start with the most basic of them, the Acts that are related to the wages and payments to the employees.
➔ Minimum Wages Act, 1948
The Minimum Wages Act ensures fair compensation to the employees for their time and effort. The act is applicable for both skilled and unskilled workers. The wages are set by the state government as well as the central government. A firm needs to make sure that the wages they provide are equal to or greater than the minimum compensation set by the regulations.
There are multiple factors that need to be determined to fix the minimum wage. Some of the factors that affect minimum wages include the region, type of industry, nature of work, and more. The minimum wages are revised regularly to ensure that wages are still fair to workers considering inflation and various elements.
➔ The Payment of Wages Act, 2017
The Payment of Wages Act ensures that only statutory deductions are made in wages that are to be provided to the employees. In addition to that the Act also ensures that the employer pays the required compensation till the 10th of every month.
➔ The Payment of Bonus Act 2007
The Payment of Bonus Act ensures that the employees within the establishment with more than 20 employees pay annual bonuses to their employees. The amount that is paid in the bonus depends on the profits made by the company that year and the salary of the employees. The act is applicable to certain industries and types of organizations.
➔ TDS Deduction
This is a deduction made in the employee salary at the source. That means the employer deducts a certain percentage of the employee’s salary as a tax amount according to the tax slab and pays it to the government on behalf of employees.
There are several taxable and non-taxable components in the compensation package of employees and the calculations need to be made carefully. The employee can also file an income tax return for the additional amount that’s been deducted as TDS from their salaries.
➔ PF Deduction
Provident fund is the mandatory deduction to be made in the employee’s salary every month. There is also a certain amount that employers need to contribute toward an employee’s PF.
The provident fund is supposed to be used as a pension or in unforeseen events such as an employee’s death. The amount of contribution to be made varies according to the state’s law as well as the remuneration that the employee receives.
➔ The Employees State Insurance Act, 1948
The ESI Act mandates the contribution towards employee medical insurance from both the employee and the employer. The percentages of these contributions vary. The act ensures that the employee gets medical benefits in case of accidents, sickness, and maternity. This is a mandatory contribution for establishments with more than 20 employees.
Challenges faced while following Compliance
Let’s discuss a few challenges that businesses face while they are following compliance.
➔ Not Enough Awareness
Compliance requirements if seen as an additional task, something that is not a part of business operations. Sadly higher management have the same perspective as they see compliance issue as something very complicated in nature.
The same lack of enthusiasm chief compliance officer is communicated to the middle-level managers and other employees. This often results in several unnecessary penalties that would rather have been easily avoided.
➔ Lack of Expertise
Most organizations don’t have a dedicated department for compliance issues. It’s usually just a team of 1-3 people if companies have expanded business operations.
Whereas the majority of small and medium-sized companies rely on people working in various departments to take common compliance issues as an additional responsibility.
That causes many organizations a lot of confusion and careless attitude leading to insufficient coordination, duplication in payment as well as totally missing out on some of the crucial legal compliance issues.
➔ Constant Changes
The companies need to follow plenty of rules and regulations that include laws set by central and state governments as well as rules and mandates by various regulatory bodies. In addition to all these processes organizations also need to constantly keep up with the changes in every related laws and regulations which are constantly changing.
Collectively all these factors and processes become difficult to manage despite the company’s best intentions.
➔ Manual Approach
A huge part of legal compliance is keeping data records for various business transactions such as certificates, permissions, payments, orders, and much more. Manually making and maintaining records for all these documents as mandated can be very challenging.
Finding and producing the required piece of paper on demand of the regulatory body becomes a bigger challenge. In addition to the compliance problem is the issue that the regulatory bodies often mandate to maintain these records for years which often lead to the issue of insufficient physical space to store them.
Furthermore, all the paper documentation is vulnerable to manipulation, and breach of data privacy. There is also a risk to the security of documents by theft and one can not avoid the risks of fire and floods which are unpredictable risks.
How to Overcome Compliance Risks?
It’s essential to follow the compliance, here are a few steps that you can take to mitigate compliance issues for your company.
➔ Stay Updated
Always be aware of any changes in the labour laws, policies from various regulatory bodies as well as government policies. This way you can ensure that you don’t fail to keep required compliance just because you are still busy following guidelines before changes.
➔ Keep Documentation
Ensure that the organization keeps all the necessary documentation related to financial transactions and payments. You also have to keep up with the necessary documentation related to sensitive information due to the payroll, taxes as well and other documentation related to federal regulations.
➔ Conduct Regular Audits
The best way to identify compliance risks is to conduct regular internal compliance audits. The internal audits will help you to see new risks and ensure that you don’t miss on the crucial regulatory mandates by identifying the compliance and safety issues in time.
➔ Create Supportive Policies
You can make compliance an integral part of the company’s tasks and procedures by making sure that it is a part of organizational policies.
All the compliance issues related to the various departments in the company will be followed. That also saves you from the last-minute rush that is likely to happen when you don’t have a well-organized compliance procedure in place.
➔ Spread Awareness
As an organization, you need to spread awareness to your employees about all the policies and compliance that need to be followed.
Once employees are aware of the requirements that need to be fulfilled they are more likely to follow these guidelines so you can easily keep up with the compliance easily. That includes moral and ethical behaviour and practices for the safety and health administration of a business.
That will make compliance a part of the business strategy and easy to follow. In addition to that you can use modern HRMS software that can automate a significant chunk of compliance along with payroll or hire someone specialized in compliance issues to help your company.
Summing it Up
All the rules and regulations that the companies need to follow under compliance can be confusing and hectic without a proper system. Businesses need to build a dedicated team and make compliance issues a part of company policies. That will ensure that all the necessary documents and other mandatory requirements are in place.
Systematic compliance risk management by staying updated with any changes can avoid an organization’s potential exposure to compliance risks such as penalties or lawsuits.