Importance of Statutory Compliance for Manufacturing Industries

Importance of Statutory Compliance

Statutory compliances help businesses to operate responsibly and follow the regulations set forth by the governing authorities on how they should treat their employees. It can also be said to be a pre-defined legal framework, and all organizations must function according to it. 

Adhering to all rules, laws, and policies that are established by the authorities for an organization to obey is known as statutory compliance for business. An organization and all its employees must adhere to the regulations and legal requirements set forth by the regulatory office and the industrial bodies.

It is imperative that all businesses – big and small, follow state and central labor rules. These regulations protect the interests of the company, the employee, and the employer.

There are many statutory compliances and following them is not an easy task. The regulatory environment is always changing because new regulations are quickly implemented and enforced by the regulatory agencies. Companies should always be aware of how these regulations change because breaking them might result in penalties.

Why is it important for manufacturing businesses to adhere to statutory regulations?

Businesses should be informed about the latest statutory requirements for conducting business in relation to their nation’s labor laws. All businesses must follow these guidelines because if these regulations are not adhered to, it might result in penalties, fines, legal issues, and other concerns. This is why companies spend money, time, and energy trying to comply. They must make sure that everything is up to date, including professional taxes and minimum wage taxes. Companies can also enlist the assistance of outside specialists to make sure they are operating in compliance with these regulations.

What are the specific statutory regulations that manufacturing businesses need to follow, and how do they vary across different regions or countries?

The list of statutory compliance may be different for each country. The list mentioned below is one followed in India. 

Statutory Compliance Checklist in 2023

Here is a list of some important compliance areas that can be used as a guide by organizations to meet their compliance requirements.

  • The Employee Provident Fund and Miscellaneous Provision Act 1952
  • The Employees State Insurance Corporation Act 1948 (ESIC)
  • The Labour Welfare Fund Act (LWF) 1965
  • The Professional Tax Act (PT) 1975
  • The Contract Labour (Regulation & Abolition) Act 1970 (CLRA)
  • Shops and Commercial Establishments Act (S&E)
  • The Child Labour (Prohibition & Regulation Act) 1986
  • The Industrial Establishment (N&FH) Act 1963
  • The Trade Unions Act, 1926
  • The Minimum Wages Act 1948
  • The Equal Remuneration Act 1976
  • The Payment of Wages Act 1936
  • The Payment of Bonus Act 1965
  • The Payment of Gratuity Act 1972
  • The Maternity Benefit Act 1961
  • The Factories Act, 1948
  • The Employment Exchange (Compulsory Notification of Vacancies) Act 1959
  • The Employees Compensation Act 1923
  • The Apprentice Act, 1961
  • The Industrial Employment (Standing Orders) Act 1946
  • The Industrial Disputes Act 1947
  • The Interstate Migrant Workmen (Regulation of Employment and Conditions of Services) Act, 1979
  • Sexual Harassment of Women at Workplace (Prevention, Prohibition & Redressal) Act 2013

Understanding Some Main Statutory Compliances of India

1. The Minimum Wages Act, 1948 

As stated in Section 1 of the Act, the Minimum Wages Act 1948 is applicable throughout India. Any organization that employs 1000 people in the relevant state is covered by it. Except with the approval of the Central Government, it does not, however, apply to any employees of the Central Railway or of any enterprise owned by the Central Government. This act ensures that all labor – skilled and unskilled receive a minimum pay so they may sustain their livelihood. There are more than 26000 imprisonment clauses recommended if this act is not adhered to. 

2. The Employees State Insurance Act, 1948

In the event of illness, pregnancy, or work-related injury, the employees of a company are entitled to specific benefits under the ESI Act. The statute covers factories that are non-seasonal, use electricity, and employ more than ten people. Factories that do not use electricity and other organizations that employ twenty or more people also need to comply with this act.

ESIC clinics, hospitals, and authorized independent medical practitioners offer these benefits. All businesses that employ 10 or more people are required to register with the ESI schemes. Workers whose monthly pay does not exceed ₹21000/-will be eligible to check the ESIC registration requirements.

3. The Payment of Bonus Act, 1965

Payment of Bonus Act 1965 allows the workers of an organization to receive bonuses depending on productivity or profitability. Subject to a few exclusions, the Act is applicable to factories and other establishments with 20 or more employees on any given day during the fiscal year. An employee is eligible to get a minimum bonus of 8.33% of their annual income. The Act also lays out how bonuses are calculated and what can be subtracted from gross profits. Workers who have worked 30 working days in that fiscal year and are making ₹21,000 per month or less (basic + DA, excluding other allowances) are qualified for the bonus payment.

4. The Employee Provident Fund, and Miscellaneous Provision Act 1952 and ESIC

Employee Provident Funding (EPF), referred to as PF in India, enables workers to set aside a portion of their salary for use in retirement or emergency situations. Both the company and the employees contribute a certain amount to PF each month. All organizations with at least 20 employees should register with the EPF. 

Financial and reputational damages of non-compliance

Non-compliant companies have to face many problems, which will ultimately cause the downfall of their business. 

Non-Compliance Leads to Fines and Penalties

There is a long list of statutory compliance requirements that need to be observed by a company/business/organization. If the businesses do not adhere to the above list of statutory compliance, they may be charged with legal notices and have to pay penalties and taxes. While it is not possible to list down every single penalty and fine, some of them have been mentioned below:

In India, there are harsh penalties for breaking tax regulations. Such actions carry heavy fines, which can be anywhere between 100% to 300% of the tax on unreported income. For example, failure to obey a notice issued under section 142(1) or 143(2) of the Income Tax Act can lead to a penalty of Rs. 10,000 for each failure. Additionally, there are fines of between Rs. 10,000 and Rs. 1,000,000 for breaking TDS requirements. Moreover, deliberate attempts to avoid paying taxes or to underreport income beyond Rs. 25 lakh may result in fines under Section 276C. 

The employer may be required to pay interest on any overdue payments if they neglect to submit the ESI and PF contributions by the deadlines. The length of the wait affects the interest rate. For instance, depending on the length of the delay, the interest rate for postponed PF payments varies from 10% to 15% annually.

 The penalties for non-compliance with the minimum wage regulations can include imprisonment for 3 months and/or a fine of up to INR 100,000.

Suspension/Cancellation of Operational Licenses

To operate their business and adhere to industry norms, businesses need licenses. Non-compliance may cause their licenses to be permanently cancelled or suspended. This will close down the operations of the business – leading to heavy losses. 

Civil and Criminal Liabilities

Non-compliance doesn’t just mean paying fines and penalties. It will also create legal problems for the business. Generally, non-compliant corporations face both criminal and civil prosecutions, depending on how serious their behaviour is. The proprietors of the firm, the board of directors, the CEO, and/or other comparable corporate heads, or those in charge of managing the business, will typically be sued for statutory non-compliance. 

Damage to Brand Reputation 

It takes many years for a business to win the trust of its customers. Non-compliance attracts many lawsuits and fines, which puts the company’s reputation at stake. This will erode trust from suppliers and customers and discourage prospective lenders from funding the company. A brand’s spoiled reputation can reduce prospects and damage consumer confidence in the business.

Loss of Trusted Employees and Customers

Workers dislike working for organizations that don’t adhere to regulations. It is likely that the current employees will leave the company. Employees dislike working with organizations that have faced legal action, have a poor reputation for breaking government regulations, or are frequently seen paying fines for breaking the law. These businesses are considered unreliable and deceitful. They will not want their affiliation with such companies as it will tarnish their resume.

What are the common statutory compliance challenges faced by manufacturing companies?

Fulfilling statutory compliance is no joke for a business, especially when the laws and regulations constantly change. Here are some challenges that manufacturing industries face in India:

Manual Processes 

A lot of Indian businesses still monitor and track compliance using manual procedures. This manual method frequently results in mistakes, inefficiencies, and challenges in keeping accurate records. Businesses find it difficult to efficiently maintain and monitor their compliance efforts in the absence of digitization. They have difficulties completing risk assessments, compiling compliance-related data, and producing reports on schedule. Due to this lack of digitization, it may be hardt for businesses to stay up to date with the constantly shifting regulatory environment.

Limited Resources 

When it comes to compliance, many Indian businesses—small and medium-sized enterprises (SMEs) in particular—face resource limitations. It is possible that they don’t have the resources or specialized compliance teams needed to handle their compliance duties. Companies may find it difficult to invest in legal knowledge, technological infrastructure, and compliance training due to resource constraints. Insufficient resource allocation can raise the risk of non-compliance, which makes it challenging for businesses to remain on top of the constantly shifting regulatory environment.

The Indian legal system is intricate and dynamic as new rules and regulations are always added, or old ones are updated. Since businesses have their own operations to take care of, it gets difficult for them to stay updated with new changes or implementations in compliance. Most times, there may not be any systematic guidelines that allow familiarization with legal updates, which will ultimately lead to noncompliance and possible legal consequences.

Poor Management 

If the top management of an organization disregards the significance of statutory compliance, the company will suffer. When senior management is unaware or does not prioritize compliance, the juniors follow the same. A culture that is not focused on compliance may result in a lenient view of legal requirements. Ignorance will lead to noncompliance, which can include failing to implement the appropriate policies and processes, providing staff with the necessary training, or providing enough funds for compliance-related tasks.

Lack of Expertise

The intricacy of compliance mandates in India usually surpasses the knowledge and proficiency of corporations. Comprehending and analyzing complex legal systems can be a considerable difficulty. It is possible that businesses lack access to knowledgeable legal counsel or compliance specialists who could help them traverse the complexities of regulatory compliance. This ignorance of the law may result in erroneous legal interpretations, improper compliance procedures, and even possible legal infractions. This is why businesses these days employ third parties who specifically excel in the knowledge of statutory compliance. 

What steps can manufacturing industries take to ensure they comply with all the appropriate laws and regulations?

As we already discussed, statutory compliance is intricate, and only those with the knowledge and expertise can manage it efficiently. This is why it is advised that businesses outsource their payroll department to ensure that everything is in line and they are compliant with the statutory compliances. Here are some advantages that businesses can experience if they outsource their payroll to a third party:

Financial Benefits – Payroll processing internally has the potential to take up a large amount of time and resources that could be better used for essential business operations. Businesses can free up internal resources and allow them to concentrate on strategic goals and revenue-generating duties by outsourcing payroll processes. Compared to internally processing payrolls, organizations that outsource their payroll activities have an average of 18% savings in operational expenses. 

Employee Efficiency – Payroll management involves several complex tasks, such as calculating employee salaries, deducting taxes, and producing reports. Assigning these important responsibilities to third-party payroll companies can effectively lessen the administrative burden on their internal staff. According to statistics, organizations may save an average of 40 hours a month on administrative payroll management activities when they outsource these tasks.

Staying CompliantPayroll compliance is one of the most significant things in running a business smoothly. Considering that tax laws, labor regulations, and other statutory requirements are always changing, they must be taken care of by a third party with access to and knowledge about them. Third-party partners are always updated with legislative changes, they have access to modern technologies and software that allow easy and accurate calculations, and they also invest in high-level secure features that keep your data safe and ensure all tax filings are done on time. All this ensures that you are updated with your statutory compliance. It also ensures that you do not incur any fines or penalties or are subjected to legalities. 

When businesses are free from the complexities of payroll management, they can direct their attention and resources to their main goals. Leadership may focus on strategic decision-making, innovation, and overall corporate growth as they do not have to worry about statutory compliance or any intricacies involved with them. Organizations may concentrate on their core capabilities and create a more efficient and agile corporate environment by assuring correct payroll processing, timely compliance, and decreased administrative hassles.

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