The Labour Welfare Fund (LWF) is a state-level statutory contribution, governed under respective Labour Welfare Fund Acts and Rules. Although the rate and periodicity of payment differ across states (e.g., June and December in Delhi & Haryana), its accounting and tax treatment under the Income-tax Act, 1961 must be carefully considered—especially for labour-intensive and multi-state businesses.
Nature of Contribution
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Employer’s Contribution → Treated as a business expenditure, allowable under Section 43B only on actual payment.
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Employee’s Contribution (where applicable in certain states) → Governed by Section 36(1)(va) read with Section 2(24)(x); must be deposited within statutory due dates, failing which deduction is disallowed, even if paid before return filing.
Balance Sheet Treatment
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As on 31st March (Cut-off Date):
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Any unpaid LWF (employer or employee portion) is shown under “Current Liabilities – Statutory Dues Payable”.
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If paid before 31st March, it is charged to the Profit & Loss Account as an expense.
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Illustration (Delhi/Haryana):
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Contribution for December 2024 is due in January 2025 → not payable as on 31st March 2024, hence no liability arises.
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Contribution for June 2024 is due in July 2024 → liability must be accrued as on 31st March 2024 (if expense relates to FY 2023–24).
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Tax Audit Reporting (Form 3CD)
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Clause 21(a) → Reporting of disallowance under Section 43B for unpaid employer contributions.
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Clause 21(b) → Reporting of employee contribution not deposited within due dates under the respective Labour Welfare Fund Act.
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Auditor must ensure state-wise mapping of liability and payment dates, as LWF differs across jurisdictions.
Practical Guidance for Multi-State Companies
In the digital era, labour-intensive companies often operate across multiple states. This means:
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Different rates, periodicity, and due dates for LWF in each state.
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Centralized accounting must track state-wise accruals and compliance, ensuring no liability is missed at year-end.
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In most cases, LWF is a small amount, but for large workforce companies, it can become material and requires proper accrual and disclosure.
Key Compliance Pointers
- Book employer contribution as expense only if paid before year-end, else carry forward as liability (Sec. 43B).
- Ensure employee contribution is deposited within due date prescribed under state law (Sec. 36(1)(va)).
- For multi-state entities, maintain a compliance calendar integrating all states’ LWF deadlines.
- Disclose outstanding dues clearly in Balance Sheet under statutory liabilities.
Conclusion
While the LWF liability is often small in monetary terms, its tax and audit implications are significant. Non-compliance can trigger disallowances under Section 43B/36(1)(va) and adverse reporting in Tax Audit (Form 3CD). For multi-state and labour-intensive businesses, a robust digital compliance system is the best safeguard against oversight.
