Labour Law Reform in India: What Taxpayers and SMEs Must Know
The long-awaited labour law reform in India is back in focus. While the Centre is yet to notify the four labour codes, many states have begun pushing reforms independently. For Indian businesses and tax professionals, this has major implications—especially on payroll, PF, ESI, and contractor compliance.
Why Labour Reforms Matter for Tax and Compliance
Labour law reform isn’t just about employee rights—it’s tightly linked to how businesses handle:
- Salary structuring & income tax deductions
- Provident fund (PF) contributions
- Gratuity eligibility and costs
- GST impact on manpower supply contracts
- TDS on salaries and contractor payments
Current Status: 4 Labour Codes Still Not Notified
The four proposed labour codes by the central government:
- Code on Wages, 2019
- Industrial Relations Code, 2020
- Social Security Code, 2020
- Occupational Safety, Health and Working Conditions Code, 2020
These aim to simplify 29 existing labour laws. However, as of April 2025:
- They are not yet implemented nationwide.
- Several states like Gujarat, UP, Madhya Pradesh, Karnataka, and Haryana have begun revising their own labour rules under the codes.
- Others are waiting for uniform implementation guidelines.
What Does It Mean for Businesses?
Until central notification happens, compliance will vary state-wise. For taxpayers and SMEs:
| Aspect | Current Regime | Post-Code (State-level if implemented) |
|---|---|---|
| PF wage base | Basic + DA | Likely to cover 50% of total CTC |
| Gratuity | After 5 years | Rules may get relaxed or made uniform |
| Bonus Act | Threshold-based | May widen eligibility |
| Contract labour | State laws apply | May come under uniform conditions |
Tax Filing and Payroll
- Higher PF contributions: If wage definition includes full CTC, both employer and employee contributions rise—affecting take-home and deductible expenses.
- New thresholds for ESI: May change employer liabilities under employee insurance.
- TDS recalculations: With new salary structuring norms, monthly TDS might need recalibration under Section 192.
- GST on contract staffing: Clarified scope under labour code may affect service taxability.
Get State-Specific Clarity Now
📌 Don’t wait for a national rollout.
If you operate in more than one state, ensure your payroll, PF, and contractor setups align with each state’s notified rules.