It’s been close to two decades now that provisions of Section 80JJAA^[1] are part of the statute book. It was introduced with a view to provide impetus to employers to generate more employment opportunities. The deduction was granted for three years as 30 per cent of additional wages paid to the new regular workmen. The Section has undergone some changes over the years; but Finance Act, 2016 has brought a paradigm shift as regards the benefits available under this Section.

Under the earlier provisions, the benefits were restricted to companies^[2] having profits and gains from any industrial undertaking engaged in manufacture or production of article or thing^[3]. The additional deduction of 30 per cent was available only in respect of wages paid to new regular workmen and other employees were excluded. Further, there was a minimum threshold of 100 workmen^[4] for being eligible for deduction and such workmen needed to be employed for a period of not less than 300 days during the year in order that the wages paid to such workmen are eligible for the deduction. This means that workmen newly hired during April or May (or in the beginning of June) were only eligible to be considered. These conditions significantly restricted the benefits available under this provision. Virtually, many companies making huge investments in India were either not able to claim the benefit or the benefit available used to be minimal in view of these restrictive conditions.

The Finance Act, 2016 has substituted the provisions of this Section by an altogether new provision, thereby bringing a paradigm shift as regards the benefits available under this Section. While quantum of deduction at 30 per cent and benefit for three years, have been kept constant, other notable changes have been enumerated below: 

i) With a view to extend the employment generation incentive to all sectors, the stipulation regarding manufacturing of goods in a factory has been removed; 

ii) Thirty per cent of additional employee cost (instead of additional wages) would be now available as deduction, thereby enlarging the coverage to any employee and not merely a workman;

iii) There is no minimum threshold of employees specified in order to be eligible for the benefit of the section – however, an employee not participating in the recognised provident fund would not be considered for calculating additional employee cost eligible for the benefit, in view of which the number of employees threshold for provident fund contribution is the relevant factor for eligibility;

iv) The minimum employment period during the year has been reduced from 300 days to 240 days^[5] – thus, employees newly hired during April to July (or in the beginning of August) would be now eligible to be considered for computing deduction;

v) The condition regarding minimum 10 per cent increase in the number of workmen has also been done away with and thus, any increase in number of employees is sufficient to be eligible for the benefit – this may make the deduction a regular feature of return of income for many assessees.

While there have been welcome changes in the provision, thereby enlarging the benefit and promoting employment growth opportunities, at the same time, the Legislature has also inserted various riders to prevent any abuse and achieve the purpose of employment growth for lower income class. Key changes in this regard have been enumerated below: 

i) Salary paid to employees, who have total emoluments of more than twenty-five thousand rupees per month, will not be considered for computing the additional deduction – thus, the purpose may be to restrict the benefit to the extent of employment generated for lower income class of the society 

ii) The restriction of benefit in respect of employees contributing to provident fund may be aimed to encourage direct employment than contract labour in addition to spreading social security cover

iii) Deduction would not be available in case of business formed by splitting up or reconstruction of an existing business (generally present in tax holiday Sections such as Section 80IA, 80IB, etc.)

iv) Further, the emoluments need to be paid by account payee cheque or account payee bank draft or by use of electronic clearing system through a bank account – this is expected to help ensure that deduction is claimed for genuine payments and banking transactions are promoted. However, surprisingly, this condition is prescribed for existing business and not specifically in respect of new business, which may give rise to litigation.

The new Section has also thrown some light on various aspects, which may be helpful to curb litigation. The term ’emoluments’ has been categorically defined, giving clarity on amount to be considered for computing the deduction. It has also been clarified that in first year of a new business, deduction will be allowed for emoluments paid or payable to employees employed during that year.

However, there are certain areas, where also some clarity could have been provided to avoid litigation. Particularly, it could have been specifically clarified as to whether the quantum of deduction needs to remain constant for all three years, despite subsequent changes in employment or salary levels. For instance, clarity could have been provided as to whether the amount of deduction claimed in first year would remain constant in subsequent years, even in case some employees leave the organization in subsequent two years, when the deduction is being claimed or the salary of such employee crosses the threshold of twenty-five thousand rupees per month in subsequent two years. Similar issue could arise as to whether deduction needs to remain constant in subsequent years, despite increase in salary of such employees, in respect of whom the additional deduction is claimed.

Further, the benefit of Section could also get significantly restricted, as salary of employees hired during August or subsequent months would not be considered for deduction. As such, the benefit should be available in subsequent year, if the employees continue to be in employment. Otherwise, the benefit would not be available in respect of employees hired in majority part of the year. Instead of leaving this issue to divergent possible interpretations, clarity could have been provided and possibly, benefit could have been extended to such cases as well.

Hope, with some of the welcome changes noted above, we may see the deduction forming part of return of income for many assessees.

=============================================================================================

[1] of the Income-tax Act, 1961

[2] Later extended to all categories of assessees by Finance Act, 2015 and now restricted by Finance Act, 2016 to assessees to whom provisions of section 44AB apply

[3] Later restricted to manufacture of goods in a factory by Finance Act, 2013

[4] Later relaxed to 50 workmen by Finance Act, 2015

[5] 150 days, in case of assesse engaged in the business of manufacturing of apparel