Regulatory Crossfire of the Gig Worker: Interplay Between the Four Labour Codes and the Income Tax Act, 2025

I. ABSTRACT

The year 2025 witnessed the unprecedented, legislatively constructed re-ordering and restructuring of India’s economic and regulatory domain, where the combined and holistic implementation of the four Labour Codes and the enactment of the revolutionary Income Tax Act, 2025, replaced the decades-old Income-Tax Act, 1961, thereby changing the entire legal structure of India’s workforce. These converging trends of direct tax reforms and labour welfare consolidation have, however, led to a colossal socio-legal paradox within the domain of work rendered by the new digital age: gig and platform workers.

Whereas the Code on Social Security, 2020 brings gig workers from the informal grey to the formal bright, according to them, the stature of a separate class for benefits and pensions, and entitling their services to contributions from corporate aggregators, the Income Tax Act, 2025 continues to regard gig workers primarily as independent contractors and commercial undertakings. This brief article explores the contradiction in thought and statute between aggressive TDS mechanisms and social welfare legislation, examining the overall legal repercussions of such a regulatory crossfire and suggesting a statutory union.

 

Keywords: Gig Workers, Platform Economy, Code on Social Security, 2020, Income Tax Act, 2025, Employment Classification, Tax Deducted at Source (TDS), Regulatory Harmonisation.

II. INTRODUCTION

The year 2025 stands as a milestone in India’s modernisation regulatory agenda, with two broad laws having reshaped India’s labour and tax structure. On the one hand, the implementation of the Four Labour Codes consolidated 29 individual labour statutes into four laws: The Code on Wages[1], The Industrial Relations Code[2], The Code on Social Security[3], and The Occupational Safety, Health and Working Conditions Code[4]. Particularly noteworthy, the Code on Social Security legally recognised “gig workers” and “platform workers” as distinct categories and created a framework to provide them with social security benefits via digital aggregators’ contributions.

In parallel, the Parliament legislated the Income Tax Act 2025[5], replacing a “difficult to amend and much amended taxing legislation”[6] with a streamlined law based on a unified Tax Year, automated compliance, and a comprehensive digital economy legislation, in efforts to improve tax certainty, efficiency and ease of compliance for taxpayers in a technology-driven environment.

These two comprehensive pieces of legislation, however, have brought about an unintended legal paradox in the pursuit of the goal of modernization of regulation. While the former classifies gig workers from a welfare perspective of an economically vulnerable player, providing them protection in the platform ecosystem, the latter still categorises the same individual as an independent contractor/self-employed professional. This leads to two opposing classifications of gig workers; for social security purposes, he is an independent worker entitled to protection, whereas for taxation, he remains an independent businessman.

The purpose of this article is to highlight the ongoing conflict between the Four Labour Codes and the Income Tax Act 2025. It is argued that the coexistence of both classifications leads to confusion regarding compliance, creates inconsistencies in regulation, and conceptually blurs the legal status of gig workers. Finally, the article proposes an exploration of the idea of an intermediate “hybrid worker” status[7] in the changing landscape of platform work, which harmonises social security provisions with tax duties.

III. LEGAL ANALYSIS

The discrepancy between the Code on Social Security and the Income Tax Act, 2025, lies primarily in the contrasting way the law understands a gig worker’s position. The former endeavours to reflect the current reality of the digital economy through an inclusive, welfare-centred approach, while the latter remains anchored in a black and white system of employees versus self-employed workers[8].

The Conceptual Mismatch

The Code on Social Security defines gig workers and platform workers as two distinct categories operating outside the realm of the conventional employment relationship[9]. Despite not being defined as ’employee’, the code obligates the aggregators to fulfil social security duties and extend welfare benefits, such as insurance, medical assistance, and pensions[10](10). This perspective presumes that a gig worker, despite being independent according to the employment agreement, has functions that depend upon the directions given by the digital platform and thus requires legal protection.

The Income Tax Act, 2025, tells quite a different story. Tax law makes a distinction between two main kinds of income: income from an employer-employee relation ( salary ), and income from a business or profession (profit ). As gig workers don’t have any kind of employment contract and are part of the platform economy, their income is normally taxed as business profit, hence they are seen as businessmen and a separate business unit for tax purposes[11], whilst being considered as workers to be protected by social welfare schemes.

The absurd result of such a dichotomy is the State recognising the workers’ economic dependence when there is a need to grant welfare benefits, and treating them as independent businessmen when the objective is the revenue of the State. This contradiction leads to confusion and incoherence in the legal framework of the platform economy, and puts in doubt the true nature of gig work.

Financial and Compliance Friction

However, such a legal disparity does not end within the arena of abstract legal argument but has ramifications for the worker’s livelihood. Since gig workers are recognised as independent professionals, tax deductions are automatically applied to all amounts paid by the digital platforms under the withholding tax system for commercial service providers[12]. This means that the actual take-home pay is significantly less, especially when the amount earned is small and the work is unstable. In contrast to established businesses that can tolerate the initial cash flow dip from withholding tax, gig workers largely depend on the earnings from work on a daily or weekly basis to make ends meet. The burden of completing tax compliance formalities later and filing for refunds by the end of the tax year, therefore, falls disproportionately on the poor and vulnerable workers[13].

The Dilemma of the Aggregator

This disparity also creates confusion and ambiguity for digital platforms. When an aggregator complies with the provisions of the Code on Social Security by setting up welfare mechanisms, implementing insurance schemes, formalising work systems, or enhancing supervisory efforts, these steps might be interpreted as evidence of control by the tax authorities.

Tests like ‘control’, ‘integration’, and ‘economic dependence’ are applied in Indian tax jurisprudence to determine an employment relation. Should the endeavours of the platform to adhere to the labour welfare provisions be perceived as controlling the platform’s gig workers, then the aggregator will stand exposed to a retrospective classification as an employer with a resulting added tax burden, penalty and a long legal tussle.

The outcome is that on one hand, labour law is pushing the platform towards greater employer-like responsibility, while on the other hand, tax law is deterring it from taking such steps due to fear of further tax implications. The resultant atmosphere is one of uncertainty for the worker, the platform, and the regulator. The emergence of the platform economy has indeed highlighted the inherent limitations of a rigid classification of an employee versus a contract worker. The intermediate position occupied by a gig worker cannot be confined within the four corners of the existing legal framework. The disagreement between the Four Labour Codes and the Income Tax Act, 2025, in essence, mirrors a larger challenge faced by modern law: how to regulate the reality of work that is formalistic rather than substantial in nature[14].

IV. SUPPORTING AUTHORITY

The regulatory paradox of platform workers is evidenced by both legislation and case law. While the new labour laws explicitly address the working conditions of platform workers, the existing tax legislation still classifies these workers under existing categories, derived from the non-digital era.

Statutory Divergence

Legislation / Framework	Classification	Legal Consequence
Code on Social Security, 2020	Gig Worker / Platform Worker [Sections 2(35) & 2(60)]	Entitled to social security benefits funded through aggregator contributions.
Income Tax Act, 2025	Independent Contractor / Business or Professional Earner	Subject to withholding taxes and business-income compliance requirements.

Therefore, while the existing legislation recognises the workers’ economic dependence and accords welfare to them under labour law, it views the very same worker as an independent commercial entity under tax law.

The Evolution of Judicial Precedents

Traditionally, in India, courts have determined the master-servant relationship on the basis of the “Control Test”. In D.C. Dewan Mohideen Sahib v. United Bidi Workers’ Union, the Supreme Court held that it is “the degree of control over the manner in which work is to be done that constitutes the most important element”. The control test has undergone evolution, moving from the narrow aspect of an “all-encompassing, minute and precise” control over the performance of the work, to an interpretation focusing on the general picture of the worker as a part of the undertaking, with an intrinsic connection with the business and integrated into it[15].

In Sushilaben Indravadan Gandhi v. New India Assurance Co. Ltd[16], the Supreme Court took a more pragmatic approach stating that the determination of whether an individual is an employee should not be confined to the terms and expressions of the contract, but an overall assessment of the reality of the situation and that if an employee forms an integral part of the employer’s undertaking and is directly related with its business, then it would be an employment relationship, regardless of the form that contract takes.

The above reasoning is directly applicable to the gig economy, where the worker may seem to be an independent entity contractually, yet completely dependent on the platform, economically. Nevertheless, despite the development of law on the concept of the ’employee’, the Income Tax Act 2025 does not have a hybrid model and continues to have two separate categories of employees and contractual employees only[17]. This leads to an evident contradiction between welfare legislation and tax law.

V. RECOMMENDATIONS / SUGGESTIONS

To ameliorate this systemic friction and shield millions of gig workers from administrative harassment, the following legislative and structural rectifications are strongly advised:

[1] Formalisation of ‘Dependent Contractor’ Category: Rule-making powers under the Income Tax Act, 2025 should be exercised by the Central Board of Direct Taxes (CBDT) to specifically create a third class of taxpayer- ‘ Dependent Contractor ‘- where more than 70% of an individual’s yearly earnings come from a single digital aggregator platform.

[2] A Uniform, Micro- Tax Deducted at Source (TDS) Ceiling: Rather than being subject to commercial or professional TDS codes, an exclusive, micro-TDS tax at an ultra-low, fixed rate (a floor of 0.5%-1%) should be created within direct tax rules, Covering the registered platform workers, where the state will be able to monitor their earnings without affecting the liquidity from the daily earnings of the workers.

[3] Inter-Ministerial Statutory Immunity: through the amendment or by a binding circular, an immunity shield should be enacted, providing that the fulfilment of the social welfare contribution requirement of the Code on Social Security (Worker’s Insurance or Worker’s Pension Account) cannot be used by the Income Tax Department to qualify the nature of the relationship as that of an employer-employee contract of service.

[4] Presumptive Taxation Relief: limits on presumptive tax under the Income Tax Act 2025 be enlarged so that gig workers fall automatically within the ambit of this provision, and a certain percentage of the earnings be treated as a statutory expense instead of mandating an independent business run through corporate-style accounts.

VI. CONCLUSION

With the advent of the platform economy, we see the erosion of the distinction between employee and independent contractor and the labour reforms undertaken by the Indian government have recognised this erosion so that the benefits of social security accrue to gig and platform workers. However, the taxation structure remains a system of the past; it proceeds as though all these workers are business-owners or independent entrepreneurs.

This legal dichotomy is far more than an issue of technical drafting; it is a contradiction between policy concerning welfare and policy concerning revenue. The march of digital labour on the Indian economy is a foregone conclusion, and finding a way to legally coherently work with this demands a new paradigm of regulation for a mixed form of work.

“The law must adapt itself to the changing conditions of society.” — Justice P. B. Gajendragadkar 

Instead of jumping from one dichotomy to another, Indian labour laws now have to incorporate the fact that gig workers are both by every means of the word. With platform capitalism dominating, now, more than ever, the struggle will not be to classify gig workers for either welfare or for tax, but simply to recognise them.

VII. REFERENCES

[1] The Code on Wages, 2019, No. 29, Acts of Parliament, 2019 (India).

[2] The Industrial Relations Code, 2020, No. 35, Acts of Parliament, 2020 (India).

[3] The Code on Social Security, 2020, No. 36, Acts of Parliament, 2020 (India).

[4] The Occupational Safety, Health and Working Conditions Code, 2020, No. 37, Acts of Parliament, 2020 (India).

[5] The Income Tax Act, 2025, No. 30, Acts of Parliament, 2025 (India).

[6] K.P. Varghese v. Income Tax Officer, (1981) 4 S.C.C. 173 (India).

[7] Uber BV v. Aslam, [2021] U.K.S.C. 5 & GUY DAVIDOV, A PURPOSIVE APPROACH TO LABOUR LAW 115-20 (1st ed. 2016).

[8] Ram Prashad v. Commissioner of Income Tax, (1972) 2 S.C.C. 696 (India).

[9] The Code on Social Security, 2020, No. 36, Acts of Parliament, 2020, §§ 2(35), 2(61) (India).

[10] Id. § 114.

[11] Alok Prasanna Kumar, Regulating the Gig Economy, 55 ECON. & POL. WEEKLY 10, 11-12 (2020).

[12] Supra, Note 5, § 393 (India).

[13] FAIRWORK INDIA TEAM, FAIRWORK INDIA RATINGS 2024: LABOUR STANDARDS IN THE PLATFORM ECONOMY 18-22 (Centre for IT and Public Policy 2024).

[14] GUY DAVIDOV, A PURPOSIVE APPROACH TO LABOUR LAW 142-47 (1st ed. 2016).

[15] Supra, Note 14.

[16] Sushilaben Indravadan Gandhi v. New India Assurance Co. Ltd., A.I.R. 2020 S.C. 1977 (India).

[17] Supra, Note 5.