India is witnessing today an increasing growth of contractual employment in the IT sector, as the pandemic accelerated the need for digital transformation across all sectors. By the end of 2020, market trends had already indicated a remarkable rise in the number of contractual employees and the demand for qualified tech contractors in India is showing no signs of cutback.
Post-pandemic, India-based employers, as well as international companies based in other countries around the globe, are looking for more contractual than permanent IT roles. Striving to secure the best talent and skill sets, they have turned their interest to the Indian workforce, especially for short-term projects and project-oriented work.
This upward growth has opened up ample opportunities to job seekers in the IT sector, who get to reap not only the abounding benefits of working in tech but also the perks of being an IT contractor – such as higher salaries, more flexibility and the ability to work for multiple clients at the same time, just to name a few.
All in all, things are looking great for IT contractors in India, right? The demand is high, the opportunities are plenty, and the benefits are rich. So, why so much cultural bias and misconceptions towards contractual employment?
Apparently, the “stigma” attached to contractual working in India and the uncertainty over legal and financial questions are some of the main reasons deterring skilled individuals from further exploring a contracting role.
In this article, Templeton’s tech recruitment specialists are on a mission to reveal what it’s really like to work as a tech contractor in India.
Employee vs Contractor: The Legal Framework
Today, India is the most popular outsourcing destination due to the Indian nation’s inclination to hard work, intelligence and personal diligence. Yet, contract employment still remains a grey area for the majority of the workforce of India, especially regarding the legal framework differentiating employees from contractors.
Fundamentally, Indian workers are classified into two categories, according to the Industrial Disputes Act of 1947: Workmen and Employees. The Workmen are generally the skilled or unskilled operational labourers, while the Employees are the supervisors/controllers of the workforce in an organisation. Employing contractors is even prohibited in certain cases and only employers with a special license of “principal employer” are entitled to hire contract employees. At the same time, the lines differentiating workers from contractors can get quite blurred and, on several occasions, employers – on purpose and illegally – label workers as independent contractors to save money from taxes.
To avoid employee misclassification, the Supreme Court in India have applied tests and factors to determine whether a person can be classified as an employee or a contractor:
The Control Test: The control test (or prima facie test) aims to discover if the employment relationship between the employer and the worker is a master-servant relationship. It also aims to determine if the employer controls the nature of the work done and how the employee carries out their duties.
The Integration Test: On the other hand, the integration test plays a crucial role in determining if the worker enjoys absolute independence from the organisation or whether the employee is fully integrated and cared for by the employer (e.g. whether the payment of salary is by the principal employer or the contractor).
Further, there are several other factors (questions) that can determine the validity of an employee’s classification, such as:
- Who is the appointing authority?
- Who is the paymaster?
- Who has the sole power to dismiss?
- What is the length of the service delivery by the worker?
- What is the extent of control and supervision?
- What is the nature of the job?
- What is the nature of the establishment?
- Who has the right to reject?
- Who provided the equipment for the completion of work? Etc.
For further protection of the Indian workforce, every worker is classified initially as an employee in an organisation unless proven otherwise. However, these questions and the two tests can provide a factual determination of the classification of each worker. Even a default in one or two of the questions could establish that the organisation is guilty of misclassifying the employee.
Employee vs Contractor: Understanding the Differences
The distinction between contractors and employees goes far beyond a difference in the title:
Differences in Taxation
For law enforcement agencies, taxation is the most critical distinguishable feature. In the cases of employees, employers withhold and remit taxes on their behalf. In contrast, independent contractors pay their own taxes and usually withhold Value Added Taxes (VAT) and remit the same on behalf of their clients.
Differences in Time & Place
Employees’ hours, days and location of work are set by the employer, while contractors have greater control over their job roles and the type of work they offer to companies. They can carry out the work however they want and also work for numerous businesses at once. Additionally, employers can’t provide work equipment or office space to contractors, as such actions could indicate an employer-employee relationship.
Differences in Benefit Entitlement
In an employer-employee relationship, all statutory benefits are applicable and they include but are not limited to pension and insurance scheme, employee state insurance, workman’s compensation, gratuity, statutory bonus, maternity benefit, leaves and holidays, etc. Contractors’ entitlements are limited, however, companies must fulfil health and safety and data protection laws for them.
Differences in Agreement
Employees have a long-term, permanent commitment to a company and, under their contract, they must receive and complete work on a regular, ongoing basis. On the other hand, contractors have no permanent obligation to the companies that request work from them and can accept or reject requests as they choose. If they do accept the work, they are only obliged to work for the company for as long as that set amount of work takes. Moreover, any contractor agreement in India should clarify that the arrangement is not one between employer-employee and that the worker is an independent party.
Differences in Wage Requirements
For employees, the company establishes their fixed salary and they must at least get paid the minimum wage. For contractors, things are quite different. They are the ones setting the amount of money they want to charge for each job, which can vary depending on the level of work. Therefore, it is not on a salary basis. Moreover, they usually issue invoices for the contractual work they provide.
Differences in Level of Commitment
Generally, employees only work for the company with whom they’re employed and, in many cases, companies might also set out a clause in their contract that specifically states that they can’t work for someone else in the same industry. In contrast, contractors can provide work to more than one business at a time and they can also work with businesses in the same industry. Depending on their type of work, this may often be the case.
Like many other countries, India has recently revisited the definitions of employee and contractor to account for changes brought on by the gig economy, as well as to avoid misclassification of workers.
The Truth about Being a Tech Contractor in India
Here are some of the most common myths and facts about what it means to be an IT contractor in India:
Myth – It’s hard to find an IT contracting job in India.
Reality: The demand for Indian tech contractors was always high but it was accelerated by the Covid-19 disruption. And the demand is here to stay, as the benefits of contractual working are numerous for both companies and contractors.
Today, more than ever before, companies rely greatly on IT contractors with specific skills to add to their workforce, as the need to upgrade technology has jumped exceedingly. Thus, tech professionals located in major cities of India, including Bangalore, Mumbai, Kolkata, Jaipur, Pune, Ahmedabad and Delhi, as well as in other Indian regions are becoming highly sought after for contractual employment.
Particularly, skills such as Full-stack development, AWS, Salesforce, Azure, Java, Cloud Technologies, React JS, Node JS, Angular, UI, UX, and Cyber Security are in high demand, while some of the fastest-growing job titles used by hiring managers when searching for tech contractors in India include:
- Front End Developer
- Data Analyst
- Web Developer
- Data Scientist
- Java Developer
- Full Stack Developer
- Cyber Security
- Software Developer
- Software Engineer
In fact, India is one of the top countries to fulfil companies' software requirements. The factors attracting potential employers are the reputable skills offered by Indian developers, as well as the lower costs.
Discover the Top 10 Tech Skills for 2023 and Beyond.
Myth – Working as a tech contractor isn’t worth it / the financial benefits are better for permanent employees.
Reality: Apparently, working as a contractor in India is considered less prestigious than having a full-time job, even if it translates to gaining less. And most of the time, that is actually the case.
Salaries for IT contract workers in India are competitive with salaries in other areas of the world. Among other things, this means that contractors earn more money than employees do and that’s mainly because they have three major advantages: they typically charge more, they can deduct their expenses and they can work for multiple clients at the same time, maximising their earnings.
However, being a contractor offers much more than financial advantages over full-time employees. By working as an IT contractor, in India or elsewhere, you:
- Have the ability to work on your own, flexible schedule.
- Have the opportunity to work in many different industries and types of jobs until you find the one that fits your career passion.
- Obtain knowledge while keeping the doors open for more employment opportunities.
- Gain different skills in a short period of time.
- Can build a larger professional network when working in several contract positions.
- Have a better work-life balance.
- Can be your own boss.
Moreover, the interview process is generally much faster than a permanent position, which is also an important factor to consider.
Myth – You can’t work as a contractor in India for a foreign/international company.
Reality: There is no prohibition on the use of independent contractors from foreign companies under the Contract Labour Act, 1970 or any other Indian law. Thus, foreign or international companies have every legal right to hire IT contractors to work remotely for them directly from India, unless they fall under certain restrictions with respect to the use of contract labourers. Any contractual hiring can be conducted through an agency or any third party unless the foreign company has a legal entity in India.
From an employee’s perspective, there aren’t any legal restrictions as well to prevent them from working as an independent contractor for any foreign company. In fact, one of the best perks of being a tech contractor is that you have the potential to take your profession anywhere, without even having to leave your house.
Myth – You need a visa to work remotely for a company based in another country.
Reality: This is a tricky one, so first things first.
If you are an Indian citizen, living and working in India remotely as a contractor for a foreign company based in another country, you don’t need a work visa to conduct business with them. However, there are several occasions that you might need to issue a visa, including:
- In case you have agreed by contract to travel to the country of the company that employs you for a short period. Depending on the country you’ll visit, you might need either a visitor visa or a business visa to secure entry clearance.
- In case you want to relocate to the home country of the business that contractually employs you. In this case, and depending on the country, you’re probably going to need a worker visa. For example, if you want to relocate to the UK, the Tier 2 General Visa (Tier 2 Skilled Worker Visa) is the most popular visa option. With a Tier 2 skilled worker visa, you can live and work in the UK on a long-term basis.
Myth – You don’t have to pay taxes in India if you work as a contractor for a foreign/international company based abroad.
Reality: If you’re considering the option to work as a tech contractor for a company that is based in a country other than India, bear in mind that your income will still be liable to tax in India. Unless you decide to work abroad as a contractor – in which case you are generally subject to the tax jurisdiction of the foreign country in which the company that employs you is based.
In both cases, you’ll need to issue invoices for the services you provide, unless you decide to do that through an umbrella company (see the FAQ section below).
If you’re issuing invoices yourself, make sure that they always include the following important details:
- Invoice Number and Date
- Client Name and Address
- Client TIN/GST number
- Particulars of work done
- Amount in INR (or in the currency in which you’re receiving your payments)
- Bank account details with PAN (to receive payments)
Myth – There are no protective laws and benefits for contractors in India.
Reality - Contractor Legal Protection: The truth is that contractors aren't covered by most employment-related laws. However, this doesn’t mean that they’re left unprotected. It just means that they don't have the same rights and protections afforded to employees.
In fact, if you’re working as a contractor in India, there are several laws and legislations that protect you, such as the general civil law and the CLRA (see the FAQ section below). General civil law determines most of the contractors’ rights and responsibilities while the CLRA was enacted primarily to regulate employing contract workers and protect them against exploitation.
Reality – Benefits and Insurance: Whether or not an IT contractor receives benefits depends on the company or staffing agency they’re working for. Generally, though, contract work doesn’t provide the same level of benefits you would get working as a permanent employee. On the flip side, contractors are generally paid more.
However, if benefits and big checks are equally important to you, you can seek employment through an umbrella company. Technically, then, you’re an employee of the umbrella company and, thus, entitled to employee rights and benefits. These include, but are not limited to, sick pay, holiday pay and maternity leave. Moreover, umbrella companies that are trustworthy will also provide you with insurance while you’re working on your assignments at no extra cost.
Templeton works with umbrella companies to support and protect our IT contractors in India.
Ready for your next role? Find out How to Land Your First Tech Job
Frequently Asked Questions: IT Contract Work in India
1. How to get started as a tech contractor in India?
No formal registration is required to be an IT contractor or to conduct any contractual work in India. However, you might need to show some documents to the company or the individual that has hired you (depending on the case) to perform a certain job, such as:
- PAN (Personal Account Number) for taxes
- Aadhaar number (issued by the UIDAI (“Authority”) to the residents of India after satisfying the verification process laid down by the Authority)
- Bank account for receiving payments
- Certificates of educational qualifications and other credentials
- CV with detailed information of skills, past employment experience, etc.
2. What is an Umbrella Company, and how can it help you with contracting in India?
If you are already working as a tech contractor, you might be aware that being your own boss comes along with all sorts of administrative and regulatory responsibilities that you have to handle by yourself. However, if you want to avoid all the hassle, an umbrella company can take care of all administration for you.
An umbrella company (or contractor management company) acts as an intermediary between you and your recruitment agency (or end client), while you maintain your independence as a contractor. If you decide to be employed through an umbrella company, then, that company will be responsible for dealing with administration, like collecting payments from your clients and filtering out the necessary social security and fees. You send the company your timesheets and they send you payments.
Because these companies act as your “employer”, they can sponsor you with a single work permit for multiple contracts in India. Furthermore, some umbrella companies can operate internationally, helping you take on contracts from clients in various countries and get paid in legally compliant ways.
3. What is CLRA?
The Contract Labour Registration Act (CLRA) of 1970 is legislation driven toward the welfare of contractors so that they are not exploited and also to introduce better and more comfortable work conditions. It provides the guideline based on which the terms and conditions for the outsourced workforce are regulated in any specific industry.
The CLRA applies to all firms registered in India and to contractors employing more than 20 employees, employed presently or in the past, on any day in the last year (12 months). Under the CLRA laws in India, a principal employer cannot legally employ a contract employee unless they have obtained a CLRA registration from the competent authority, i.e., the Government.
4. How do contractors receive payments in India?
India-based businesses can pay contractors with direct deposits in INR (Indian rupee) unless the contractor opens a foreign currency account. For companies based in other countries, paying contractors is considered a business transaction, thus they need to use a money transfer service that supports business transfers to India, such as PayPal or via banks. Some of the safest payment methods are:
- Direct deposits
- Paper checks
- Money orders
- Virtual wallets
Currency and Exchange Rates:
For payments made in foreign currency, the exchange rates may vary, depending on inflation, trade flow, investments, oil prices, and other factors. As of the second quarter of 2022, 1 INR is equal to:
- GBP - 0,01£
- EUR - 0,012€
- USD - 0,013$
Part of the flexibility of being a contractor is that you can agree to a payment structure and timeline that works for both you and your client. Common payment options include:
- Receive full payment before the project
- Receive payment upon the completion of the project
- Partial payments (a hybrid of pre-project and post-project payments)
- Receive payment per project or by the hour
5. What are the taxes for contractors in India?
Just like salaried individuals, freelancers/contractors in India are also liable to pay taxes, like income tax if their annual total earnings exceed INR 2.5 lakh. Here are some key points you need to be aware of:
- Contractors can also claim deductions for any expenses incurred towards work, just like business entities that run offices - like office rent, laptops, tools, equipment, machinery and travel or repair costs.
- Income earned from foreign clients will be taxable like local income.
- Clients who are required to comply with TDS provisions as per the Income Tax Act, 1961, are required to deduct TDS from payment for professional services at the prescribed rates (10%) if they exceed the threshold limit in a year (currently INR 30,000).
- Usually, clients deduct TDS (Tax Deducted at Source), which is 7.5% or 10%. Tax deducted by clients from payments is duly reflected in the contractor’s Form 26AS upon the clients’ filing of their TDS returns.
- In the event that the client fails to deduct TDS, the contractor will be liable for taxes if they exceed the basic exemption limit of INR 2.5 lakh.
- A contractor is required to file income tax return (ITR) for every financial year and pay taxes as per provisions of Income Tax Act. The tax deducted by clients is utilised for payment of tax liability and any deduction in excess of tax liability can be claimed as a refund at the time of filing of Income Tax return.
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