Since independence of India, keeping the unemployment rate under check has been a top priority of every ruling Government.  Even the present Government has taken slew of measures for employment generation such as Make in India, Prime Minister’s Employment Generation Programme, Mahatma Gandhi National Rural Employment Guarantee Act etc.
On tax part of such measures, the Income-tax Act provide various fiscal concessions to spur growth of business and thereby create job opportunities. Amongst others, such concession includes tax holiday in section 10AA, deduction under section 32AD, section 80-IA, 80-IB etc. Similarly, section 80JJAA of the Act was introduced by Finance Act, 1998 with the following intention as mentioned in the Memorandum to Finance Act, 1998:
“The country is faced with problems relating to lack of employment opportunities. In order to encourage the employers to further generate more employment opportunities, it is proposed
to insert a new section, i.e., 80JJAA”

Section 80JJAA provides incentive in form of deduction of 30% of the salary paid to additional employees hired for 3 consecutive years.  This deduction is over and above actual salary paid to such employees. Giving a simple illustration: if a company hires 100 new employees during the year with average salary of every employee being Rs 2 lacs per annum, a company may get deduction @ 30% of total salary paid to these new employees ie Rs 60 lacs per year which totals to deduction of Rs 1.8 crore over the period of 3 years.
Until 1 April 2016, the erstwhile section 80JJAA was restrictive in its scope for example:

• The deduction was limited to only manufacturing industry
• Deduction was available only for employment “workmen” which broadly included only blue collared workers
• There was a threshold of minimum 50 employees to be eligible for deduction thereby making it difficult for start-ups to claim this deduction
• The increase in number of employees was required to be at least 10% as compared to previous year

This was not in alignment with the intention to create of employment opportunities on overall basis.  Further, the language of section 80JJAA lead to various interpretational issues due to multiplicity of conditions, vagueness of the definition of some terms and not providing definition of other terms. Due to these various conditions, the applicability of the section was limited.  Thus, the incentive was not serving its intended purpose.   However, through Finance Act, 2016, the Government has brought a paradigm change by replacing the entire section with a new provision. The tax year ended 31 March 2017 was the first year of application of this new provision.

The new provision throws up opportunities due to the relaxation of conditions and clarification of past ambiguities to some extent.  However, the taxpayer still have to tread with caution as explained in the following paragraphs:

1. Qualifying taxpayer

In order to widen the incentive to all the sectors, the condition regarding “manufacturing of goods in a factory” has been removed and the incentive has been made available to all assesses having income under the head profits and gains from business. This would result in lot of employee-intensive industries being eligible for this deduction now viz, retail, hospitality, IT, infrastructure etc.  

2. Eligible additional employees

The deduction is made applicable in respect of all employees vis-à-vis only “workmen” covered in earlier section.  Thus, the deduction would be equally applicable to the blue collared employees working in factory as well as the white collared employees working in office.  In order to restrict the benefit to the extent of employment generated for lower income class of the society, employees whose total emoluments (clearly defined unlike old provisions) are more than Rs 25,000 per month, will not be considered as eligible employees for computing the deduction.  Many corporates have expressed unhappiness over this condition since, even semi-skilled employees in large organised companies may earn more than Rs 25,000 per month which do not qualify for deduction.  

3. Qualifying conditions

The minimum threshold of the number of employees (which was 50 in earlier provisions) has been removed - accordingly, smaller organisations with lesser employee base would also become eligible to claim deduction. Similarly, the condition regarding minimum 10 per cent increase in the number of employees has also been removed. Thus, theoretically, addition of even 1 employee during the year may also qualify for deduction. The minimum employment period during the year has been reduced down from 300 days to 240 days (150 days in case of the taxpayers engaged in manufacturing of apparel) – thus, new employees hired on or before 4 August of the financial year should qualify for the deduction in same year.

4. Anti-abuse provisions

While expansion in the scope and relaxation of the conditions will surely benefit the tax payers across industries, thereby enlarging the benefit and promoting employment growth opportunities, the Legislature on the other hand has also introduced various stipulations to prevent any abuse of the provisions. Key provisions in this regard have been enumerated below: 

(i) Deduction is not available if the business is formed by splitting-up or reconstruction of existing business or if the business is acquired by way of transfer or as a result of business re-organisation.  Thus, the entities formed by way of demerger, merger or slump purchase of existing businesses would not qualify for the said deduction since it does not create any new employment.

(ii) The benefit has been restricted to the employees contributing to provident fund; thereby avoiding the malpractices of showing employees only for the sake of claiming deduction and also encouraging the employers to take provident fund registrations and compliances.

(iii) Also as a part of the national agenda to curb black money, the cash payments of salaries are not covered in this incentive scheme - this is also expected to ensure that the incentive is claimed for genuine salary payments only. 

(iv) Applicability of tax audit under section 44AB and certification of deduction from Chartered Accountant is kept mandatory for the assessee to be eligible for deduction with a intention to avoid bogus claims for deduction

5. Look before you leap!

Despite majority of the aforesaid changes are welcome steps, there are still some ambiguities that can creep into the taxpayer’s journey in claiming deduction under the “new improved” section.  Some of these are explained below:

i. What is the meaning of term ‘employee’? –This may throw up lot of opportunities/ questions. Things to ponder over are whether deduction can be claimed for contract/ part-time/ casual employees/ dual employment cases? Whether legal employer has to claim the deduction or an economic employer can also claim such deduction? Reliance on the jurisprudence which defines the definition of ‘employee’ presents a possibility of wider application beyond just legal employees.   

ii. Whether the amount of deduction claimed in first year would remain constant in subsequent years or the same needs to be computed separately each year? - There could be challenges for example; when the employees leave the employer in the second or third year or there is a subsequent increase in salaries beyond Rs 25,000 pm etc

iii. Whether employees not serving 240 days in their first year of employment could be covered for the incentive in the next year?  If interpreted in narrow manner, the additional employees have to be hired before August each year which cannot be intention considering the dynamic industry situations in India.

iv. In case where a company has two undertakings representing separate businesses wherein there is increase in the headcount in one undertaking, however, on overall basis there is net attrition in the company.  In such case, whether the company should be eligible for this deduction? Considering the legislative history and various references within the provision there may still be possibility to such company to explore claiming the deduction.  

v. Deduction is available for taxpayers earning profits and gains derived from business.  Absence of the word ‘profession’ is conspicuous. Since, as per Indian jurisprudence, the term “business” and “profession” are recognised separately, professional service firms may face challenges in claiming this deduction.

Concluding thoughts

Liberalizing the provisions of section 80JJAA is a positive step in line with the employment generation agenda of the government. This benefit should incentivise the set-up of new undertakings and also expansion plans of the existing taxpayers. Despite few pitfalls and issues around interpretations, the new provision is encouraging enough to examine a claim of deduction in the tax return for FY 2016-17 shortly due. Since CBDT is playing very active role in the recent past to clarify all controversial issues, a step to clarify issues under section 80JJAA will be a welcome step.