More Indian companies are bracing for financial impacts as the country's historic labour reforms take full effect. The corporate sector faces rising expenses in the December quarter, with significant costs emerging from reworked gratuity and leave encashment calculations.
Immediate Financial Pressures
The rollout of new labour codes in November is creating immediate short-term financial pressures across industries. Tata Consultancy Services Ltd (TCS) has recorded costs of ₹2,128 crore, while HCL Technologies Ltd reported an impact of ₹956 crore. These figures highlight the substantial adjustments companies must make under the revised regulations.
Broader Wage Definitions Drive Costs
Alok Agrawal, partner at Deloitte India, explains that more companies may face additional costs due to the broader definition of wages. "Possibly, these payroll costs may also increase on account of overtime due to the broader definition of 'workers'," he said. The expanded wage definitions now bring allowances over 50% of remuneration into gratuity and other linked bases.
Gratuity represents the largest component of these extra expenses, applying to past service periods for all existing employees. This change particularly affects the services sector, where payroll costs form a large proportion of the overall cost base. Companies with basic salaries previously much lower than 50% are likely to see the most significant impact.
Employee Impact and Sectoral Effects
The new labour codes are expected to trigger higher social security contributions from both employers and employees. Employees may experience a slight reduction in take-home pay if overall cost-to-company remains unchanged, as statutory deductions increase.
Anustup Chattopadhyay, associate partner at Aon Talent Solutions, notes that IT services and manufacturing sectors with large headcounts face immediate financial pressures. Financial services companies, including non-bank lenders, will also feel the heat from these regulatory changes.
Company Responses and Assessments
TCS has clarified that gratuity payments account for approximately ₹1,800 crore of their total impact, with leave liability making up the remaining ₹300 crore. The company does not expect any exceptional impact on operating margins from the codes currently.
Samir Seksaria, TCS chief financial officer, stated during the company's post-earnings analyst call, "On the labour code, we don't expect any future impact on profitability unless the rules give more clarity. We have made an assessment and done it, and we'll call it out if there is a change in our understanding of the rules."
HCLTech reported a $109 million impact from the labour codes. Chief executive C. Vijayakumar described this as a one-time cost due to mandated obligations, with minimal ongoing costs expected in the range of 10 to 20 basis points.
Wider Industry Impact
Other companies reporting smaller impacts include Hathway Cable and Datacom Ltd, which noted a ₹2.89 crore hit, and Avenue Supermarts Ltd, which runs DMart retail stores. Avenue Supermarts stated that incremental liability for its own employees "is not material" to its standalone financial results, though it continues evaluating possible impacts for contract workforce.
The Institute of Chartered Accountants of India recently issued guidance to clarify recommended treatment of these provisions, helping companies proceed with necessary adjustments. While executives and consultants describe the current situation as a short-term adjustment, the broader implications continue unfolding across India's corporate landscape.
