Understanding various accounting & payroll functions for an Indian subsidiary

Managing a subsidiary in India comes with a range of administrative and compliance responsibilities, especially when it comes to accounting and payroll functions. Having a solid accounting system and an effective payroll mechanism is crucial to ensure your subsidiary operates smoothly and adheres to local laws and regulations. This blog will walk you through key accounting and payroll functions that need to be established for an Indian subsidiary.

Bookkeeping and Accounting Systems

First and foremost, maintaining accurate books of accounts is vital. India follows a set of accounting standards as prescribed by the Companies Act and other relevant regulations. You need to ensure that your accounting system is compliant with Indian Generally Accepted Accounting Principles (GAAP). This includes:

• Maintaining accurate records of all transactions
• Following prescribed accounting standards for financial reporting
• Preparing annual financial statements like balance sheets, profit & loss accounts, and cash flow statements

A well-structured accounting system ensures that your subsidiary is able to meet regulatory requirements and provides transparency in your financial dealings. Hiring a qualified local accountant or outsourcing to a professional accounting firm is advisable to ensure compliance and accuracy in reporting.

Payroll System

When it comes to managing employees, having an effective payroll system is essential. India has specific laws around payroll management, and it’s critical to stay on top of them. A payroll system ensures the proper processing of employee salaries while adhering to the tax and labor laws applicable in the country. Key components of payroll management include:

Withholding Taxes

Employees in India are subject to income tax, and as an employer, it’s your responsibility to withhold the appropriate amount of tax from their salaries. This involves calculating the taxable income, applying the correct tax slabs, and ensuring that the taxes are submitted to the government on time.

Professional Tax

In addition to income tax, employers must also withhold professional tax from employees. This is a state-level tax, and the rates vary from one state to another. Ensure that the professional tax is deducted and paid to the relevant state authorities.

Provident Fund (PF) and Employee State Insurance (ESI)

For companies with more than 20 employees, it is mandatory to contribute to the Provident Fund (PF). Both the employer and the employee contribute an equal amount to this savings scheme, which benefits employees post-retirement. Similarly, for companies with employees earning below ₹21,000, Employee State Insurance (ESI) is mandatory, providing social security benefits like medical care and maternity benefits.

Other Labor Licenses

Apart from PF and ESI, businesses may need to comply with other labor-related laws and obtain necessary licenses such as the Shops and Establishments Act registration and compliance with the Prevention of Sexual Harassment (POSH) Act if applicable.

Compliance Calendar

It’s crucial to maintain a compliance calendar that tracks all payroll-related obligations and accounting functions. A well-planned calendar will help ensure that all necessary filings are done on time, from monthly withholding taxes to annual financial audits. Given that compliance regulations in India are ever-evolving, it’s important to stay updated on any changes in tax laws or labor regulations to avoid penalties.

Monitoring and Staying Updated on Changes

Compliance requirements in India are dynamic and frequently change. As a subsidiary, it’s important to establish systems for continuous monitoring of regulatory updates. Hiring compliance specialists or legal advisors who can provide timely updates and guidance can help mitigate risks related to non-compliance.

Conclusion

Running an Indian subsidiary means having a reliable accounting and payroll system in place. A compliant accounting system and a streamlined payroll process will ensure that you meet all regulatory requirements, keep your employees happy, and avoid penalties. By using an organized compliance calendar and keeping up with evolving laws, you will be better positioned to navigate the complexities of doing business in India.