Union Budget 2020-2021: Is your payroll software ready to handle India’s dual tax regime?

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The Finance Ministry of India recently announced sweeping changes to the way income tax is calculated for employees during the Union Budget 2020 announcement. Union Budget 2020 offers individuals a choice: pay tax under the new regime’s lower income tax rates by forgoing the tax exemptions, or continue to pay tax under the existing income tax laws by claiming the applicable exemptions and deductions. The exemptions and deductions that would need to be forgone include inter-alia exemptions and deductions claimed widely by individuals, such as House Rent Allowance (HRA), Leave Travel Concession (LTA), standard deduction, deductions under Section 80C, deductions in relation to self-occupied house property, and set-off of loss from house property against any other source of income.

Generally, the more exemptions an individual claims, the less likely the individual is to benefit from the new optional tax regime; however, which regime is most beneficial will vary on a case-to-case basis. Whatever choices your company and your employees make, is your payroll software ready to handle this?

Evaluating payroll software

The scenario with changing tax laws

Payroll compliance is a very broad but important endeavor. There are frequent regulation changes announced by the government, there are regulations that differ from state to state, and there are regulations for specific industries. According to research conducted by the Certified Institute of Payroll Professionals, there were more than 30,000 payroll regulation changes worldwide just last year.

With regulation changes happening constantly, having outdated systems and processes that don’t handle change well limits your organization’s reactivity. A poorly structured HR and payroll team will result in tons of manual effort and require HR to spend time keeping up with payroll and compliance every month instead of supporting the business.

Difficulties of managing the Union Budget changes with spreadsheets or outdated systems?

In our previous article, Decoding the implications of old vs. new tax regime, we went in-depth about the existing tax system, the changes proposed in the upcoming tax regime, and how it will affect the employees. The changes affected employees of all age groups. Each age division has its tax slab and a tax percentage. Then there is the new scenario of not allowing all the exemptions and deductions that were available with the previous system. There is also an option to partially allow deductions that were covered in the previous tax regime.

The spreadsheet disadvantage

If you want to incorporate all these changes and manage them using a spreadsheet, it’s likely to mean chaos. You’ll have to depend on multiple spreadsheets to gather the inputs from various payroll teams, and then consolidate them onto your master payroll run sheet. With the new laws in place, you will need two different payroll run spreadsheets—one for the old tax system computation and another one for the new tax computations—and two different sheets to manage the employees in your payroll, and a master employee spreadsheet to keep track of which employee has chosen which tax regime.

Even reading this feels super taxing! And we haven’t even discussed the trivial issues that can happen with spreadsheets, which can include scattered data management, inaccurate data, unauthorized access, missing data, lack of digitization for post payroll activities, and more. So if you are planning to manage your payroll operations through spreadsheets, you’re setting yourself up for failure. Instead, take the time now to choose and invest in some payroll software that can simplify all of this for you. If you are confused as to how to choose your payroll software, head over to our guide which will help you evaluate what you need to look for in an ideal payroll solution.

The outdated systems challenge

If spreadsheets make it very difficult to adapt to the compliance changes, outdated systems present a different problem: they’re not very agile or quick to change. While they can scale at their own pace for minor payroll changes, sweeping changes like the ones introduced by the Union Budget carry a strict timeline for when the system has to be compatible.

What could have once been a strong point—the ability to customize the system according to your organization needs—will now become a hindrance because of your increased dependency on your internal IT department to reconfigure the system every time the tax laws change. With an increasing number of patches within the system, it becomes even less agile and scalable. This results in tons of manual effort and takes up HR’s time and resources just keeping up with payroll.

How cloud payroll can make taxes less taxing

Any good payroll software makes it possible to calculate taxes accurately and keep your business on a legal footing. Cloud-based software, in particular, offers the extra advantage of accommodating changes in tax rates or laws instantly, without depending on your internal IT staff to keep the system up to date.

A single update to the central server, incorporating all the various criteria introduced under the Union Budget, is all it takes to bring all your employees up to the most current compliance options. Changing tax slabs, various age groups, and different tax rates for different age groups are no problems for a cloud-based system. You will also be able to track which employee is under which tax regime effortlessly from one place.

This frees up your entire HR and payroll departments from keeping up with this monumental task. Besides all this, cloud-based payroll software automatically calculates your tax liabilities and generates structured tax reports, so you can stay well prepared for tax season. Scheduling tax reports also allows you to automate your internal audit process and provide your auditors with timely reports.

The way forward

Depending upon spreadsheets to complete the entire process of payroll leaves you at a serious disadvantage, lacking integration and digitization. The right payroll software can overcome all the shortcomings of an outdated payroll system because of its ability to stay agile, flexible, and nimble, and it can also help you stay current with trends and changing requirements. By choosing cloud-based payroll software to manage payroll, you gain more time for your business and streamline one of the most complex processes in your business.

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