Section 32: Computation of gross profits

Overview

This section of the Code on Wages, 2019, deals with how ‘gross profits’ are calculated. This calculation is crucial because it determines how much money is available to be shared as a bonus with eligible employees. Essentially, it sets the base for calculating the ‘allocable surplus’ from which bonus is paid.

Scope and Coverage

• This section applies to all establishments covered under the Code on Wages, 2019, where bonus is payable as per the provisions of the Act.
• It covers all employees who are eligible for bonus under the Code.
• There are no specific thresholds for establishments to be covered by this section, but bonus eligibility itself may have thresholds based on salary or employment duration (covered elsewhere in the Code).

Key Obligations and Rights

• Employer’s Duty: Employers are legally obligated to accurately calculate gross profits according to the method prescribed in Section 32. This isn’t just about adding up revenue; it involves specific deductions allowed under the Code.
• Employer’s Duty: Employers must maintain proper records to demonstrate how the gross profit calculation was done, in case of inspection.
• Employee’s Right: Employees have the right to understand how the gross profit is calculated, as it directly impacts their potential bonus amount. While not explicitly stated, transparency is crucial.
• Employee’s Right: Employees have the right to raise concerns if they believe the gross profit calculation is inaccurate, potentially leading to a lower bonus.

Compliance and Penalties

If an employer incorrectly calculates gross profits to reduce the bonus payable, it’s considered a violation of the Code. This can lead to inspections by Labour Officers. Penalties can include fines and, in some cases, imprisonment, as specified under the Code’s penalty provisions. Repeated or deliberate miscalculations can attract stricter penalties.

Practical Examples

• Example 1: Manufacturing Company A manufacturing company has a total revenue of ₹1,00,00,000. After deducting allowable expenses like raw material costs, depreciation, and taxes (as permitted by Section 32), the calculated gross profit is ₹20,00,000. This ₹20,00,000 forms the basis for calculating the allocable surplus and ultimately, the bonus payable to eligible employees.
• Example 2: Service Provider A software company earns ₹50,00,000 in revenue. They have significant expenses related to employee salaries and software licenses. After deducting these allowable expenses as per Section 32, their gross profit is calculated to be ₹10,00,000. Even though the revenue is high, the lower gross profit due to high expenses means a smaller amount will be available for bonus distribution.