The basic expectation of the Indian industry from the Budget 2018 was lowering of the overall tax rates as well as providing certain relaxation in the tax laws to ease doing of business in India. The taxpayers were looking forward to new schemes by the Indian Government in the field of additional employment and affordable housing.
Section 80JJAA captures one of the deductions under the Income-tax Act, 1961 ('the Act') which is provided to incentivise industries to generate additional employment. The deduction provided under the said section, is aimed at encouraging the industry to generate mass employment among semi-skilled and unskilled labourers.
This article lays down the background of the section; the conditions required to be satisfied to avail of the deduction; the amendments enacted under the Finance Act, 2018, the issues which are still pending to be clarified and scope for further liberalisation.
Amendments to Section JJAA
Under section 80JJAA of the Act, an employer was eligible to claim additional deduction on the emoluments paid to new employees over a period of three years subject to fulfilment of certain conditions. The deduction was first introduced by the Finance (No. 2) Act, 1998 with the objective to encourage employers to create more employment opportunities. Under the erstwhile provisions, the deduction was available only to Indian companies which had an industrial undertaking engaged in the manufacture or production of article or thing. The deduction was available where the new workers were employed for more than 300 days during the year and the number of new workers hired during the year was more than 10% of workmen employed on the last day of the previous year.
While the tax incentive was intended for employment of blue collared employees in the manufacturing sector, it was observed by the tax authorities that in practice it was being claimed for other employees in sectors other than manufacturing also. The provisions of section 80JJAA of the Act were thus amended vide the Finance Act, 2013 so as to provide that the deduction shall be available to an Indian Company deriving income from manufacture of goods in its "factory". The condition for an Indian company having an "industrial undertaking" was thus replaced with "factory" to prevent taxpayers from taking undue advantage of differences in interpretation.
Subsequently, the provisions were further liberalized vide Finance Act, 2015 extending the benefit to all taxpayers having manufacturing units rather than restricting it to Indian companies only. Further, in order to enable the smaller units to claim this incentive, the benefit was extended even to the units employing 50 regular workmen instead of 100 as per the earlier regulations.
With the growth of innovative business practices in India and to further liberalise the section 80JJAA of the Act, the Government recognised the need to extend the benefit to all employers rather than restricting it to manufacturing sector only. Accordingly, the erstwhile section was substituted with new provisions by the Finance Act, 2016. The provisions of section 80JJAA of the Act, as amended by the Finance Act, 2016, have been discussed in details as follows.
Provisions of section 80JJAA of the Act(before amendment by the Finance Act, 2018)
Who can claim the deduction- Any entity whose gross total income includes profit or gains derived from business and is subject to tax audit under section 44AB of the Act can claim the deduction under section 80JJAA of the Act. In case of taxpayers carrying on business, Section 44AB of the Act is applicable where the sales, turnover or gross receipts in business, exceed INR 10 million in the financial year. However, the deduction is not available in case the business is formed by splitting-up/reconstruction of existing business or when the business is acquired by way of transfer or under a business reorganisation.
What is allowed as the deduction - An amount equal to 30% of additional employee cost incurred in the course of business in the financial year is allowed as a deduction, for three consequent years including the year in which such employment is provided. This implies that in each of the three years the entity avails of a total deduction of 130% of the employee cost paid to the new employees.
Prerequisites for availing of the deduction - There must be an increase in the total number of employees on the last day of the financial year, when compared to the total number of employees employed as on the last day of the preceding financial year.
Who is an additional employee - An employee who has been employed during the year and whose employment has the effect of increasing the total number of employees employed by the employer as on the last day of the financial year.
To explain in layman terms, the salary paid to an "additional employee" shall be considered for computing the deduction, when
- the individual is employed during the year, say during the financial year 2017-18,
- the individual is on the payroll of the company on the last day of the financial year, i.e., on 31 March, 2018 and
- there is an overall increase in total number of employees when compared to the previous year, i.e., financial year 2016-17.
However, the following employees are not covered in the definition of "additional employees":
- an employee whose total emoluments are more than INR 25,000 per month; or
- an employee whose entire contribution under the Employees' Pension Scheme is paid by the Government; or
- an employee who is employed for a period of less than 240 days/150 days1 during the year; or
- an employee who does not participate in the recognised provident fund:
Employee cost on which the deduction is computed - Any sum paid or payable to an employee on account of employment, whether termed as salary or any other name, excluding
- any contribution paid/payable by the employer to any pension fund or provident fund or any other fund for the benefit of the employee; and
- any lump-sum payment paid/payable to the employee at the time of termination of his service or superannuation or voluntary retirement:
Provided that the emoluments are paid through banking channels only.
Compliance requirement -Rule 19AB of the Income-tax Rules, 1962 requires the employer to obtain Form 10DA from a practicing accountant reporting the said deduction and other information as mentioned therein. The form is required to be obtained before filing of the income-tax return for the said year.
The provisions of the Act clearly mention that no deduction shall be provided to the employer in case of non-compliance with filing of the said Form 10DA.
Provisions amended by Finance Act, 2018
The Finance Act, 2018 has come out with some relaxations in the conditions surrounding the deduction under section 80JJAA of the Act, which have provided a breather to industries which were unable to claim the benefit of the deduction earlier in certain circumstances.
One of the conditions under the provisions of section 80JJAA of the Act for availing of the deduction, was that the new employee ought to be employed by the taxpayer for a duration of more than 240 days/150 days (as the case may be) in the first year of employment itself. This condition begot protracted litigations.
In the case of LG Electronics India v. ACIT  33 taxmann.com 465 (Delhi - Tribunal) the taxpayer argued that the deduction should be available in the second year if the threshold limit of 300 days (under the erstwhile provisions) was met in such year. In another case of DCIT v. Bosch Ltd.  87 taxmann.com 351 (Bangalore - Tribunal) the taxpayer argued that the deduction should be available in the year of employment, i.e., first year in respect of permanent workmen and the condition of 300 days of employment in the first year should not be applicable for them.
The Tribunal in both the above judicial precedents denied the deduction to the taxpayers stating that the law expressly provided that the threshold limit of 300 days be completed in the first year of employment itself.
The industry felt that the condition of completing employment of 240 days/150 days (as the case may be) in the first year was an unjust limitation. There were cases where high employment was generated in later part of the year (due to any business reason) which could not claim the benefit of the deduction as the threshold limit of completion of 240/150 days (as the case may be) in the first year of employment could not be met.
Considering the demands of the industry on this issue, the condition of completing specified number of days in the first year of employment has been relaxed by the Finance Act, 2018. It has been amended now that the deduction would be available to the employer in the second year, if the employee completes the target of 240 days/150 days (as the case may be) in the second year. For instance, if a person is employed by the company in March 2018, the threshold of 240 days/150 days (as the case may be) shall be met in the financial year 2018-19 and such year shall be considered as "the year of employment" for such employee. All other provisions of section 80JJAA of the Act shall need to be complied with considering that the employee has been employed in the financial year 2018-19.
Secondly, in case of entities which were engaged in the business of manufacturing of apparel the threshold was 150 days instead of 240 days. The benefit of a reduced threshold of 150 days is further proposed to be extended to entities which are engaged in the business of manufacture of footwear or leather products. The Government recognises that these industries are labour-sensitive and, hence, it is essential to extend the incentive provided to them.
Attention is also drawn towards Section 80AC of the Act which requires a taxpayer claiming specific deductions to file their return of income within the due dates prescribed under section 139(1) of the Act. In case of failure to file the tax return within the prescribed due dates, the deduction claimed by the taxpayer shall not be allowed. Previously, section 80AC of the Act was applicable to specific deductions/incentives only, i.e., deductions provided under section 80-IA, 80-IAB, 80-IC, 80-ID and 80-IE of the Act. However, section 80AC of the Act has been amended vide Finance Act, 2018 to be applicable on all deductions as specified under any provision of Chapter VI-A of the Act under the heading "C.-Deductions in respect of certain incomes". Given the proposed amendment, no deduction shall be allowable under section 80JJAA of the Act, to the taxpayer unless he furnishes a return of his income on or before the due date specified under section 139(1) of the Act.
The amendments enacted under Finance Act, 2018 shall be applicable for the assessment year 2019-20 onwards.
Issues to be clarified
Given the multiple conditions provided in the section, much is left on the taxpayers for interpretation. Various queries have crop up at the time of practical application of the provisions and computing the deduction allowable in the hands of the employer. A few questions which needs to be deliberated upon and require clarifications have been listed below:
- If the additional employee in respect of whom deduction is claimed in year 1 and is no longer with the organisation in year 2 or year 3 due to any reason, can deduction in respect of the additional employee cost (which was claimed in the first year) still be availed in year 2 and year 3?
- What is the mechanism for computing the prescribed threshold of 240/150 days - does it include leave periods?
- What happens in case of upward revision of the salary of the additional employee? What if an employee receives total emoluments of INR 25,000 or less in the first year, but In year 2, the salary is revised such that payouts to the employee are more than INR 25,000 per month. Does the deduction lapse or would continue?
- What about benefits provided to the employees other than the monthly salary like bonus or non-monetary perquisites - Is bonus or value of non-monetary perquisites required to be taken into consideration for computation of "emoluments" eligible for deduction?
One of the issues which merits further deliberation is whether the provision (as amended by the Finance Act, 2018) that the employee shall be deemed to be employed in the succeeding year when the threshold limit of 240/150 days(as the case may be) is completed, may be considered as clarificatory and, hence, retrospective in nature. The taxpayers may explore an argument that the proviso (as introduced in the Explanation to the section vide the Finance Act, 2018) supplies an obvious omission in the section and is a necessary clarification to give the section a reasonable interpretation. If such is the case, can the taxpayer explore the option of revising their tax returns for prior years or making the claim in their pending tax proceedings, to claim the deduction, which could not be claimed earlier due to the limitation to complete the threshold of specified number of days in the first year of employment itself?
Furthermore, the deduction under section 80JJAA of the Act is not allowed if the business is acquired by the taxpayer by way of transfer or as a result of any business reorganisation. It may be argued that cases of succession of business should not be covered under this exclusion. Therefore, in the cases of succession of the business, the successor should be able to claim the deduction for the remaining number of years.
Given the ambiguities in the application of the provisions of the section under consideration, more clarifications on the interpretation and practical application would be more than welcome.
Furthermore, with the amendments made by the Finance Act, 2018, it is also necessary that the template of Form 10DA is suitably updated to reflect the amended provisions. This would ensure complete and correct disclosure.
Scope of further liberalisation
While the amendments brought in by the Finance Act, 2018 are welcome few more relaxations can be made.
Presently, the provisions of section 80JJAA of the Act are worded such, that the deduction is available only to taxpayers who are engaged in carrying out "business" activities. Taxpayers engaged in professional activities are not eligible to claim the benefit of the deduction. Therefore, it is recommended that the provisions of section 80JJAA of the Act are further liberalized such that taxpayers carrying out profession are also able to seek the benefit of the deduction.
Additionally, the monetary limit of INR 25,000 per month does not appear to be realistic, considering the rate of inflation in the economy and the current industry norms in terms of remuneration. Due to the lower monetary threshold, many taxpayers are unable to take noteworthy benefit of the incentive provided under section 80JJAA of the Act notwithstanding creating significant additional employment. It is suggested that the Government should reconsider the threshold of INR 25,000 per month and raise it so that the tax incentive can be made available to a larger number of taxpayers as a reward for generating additional employment.
Irrespective of the pending clarifications in the tax provisions, the incentive provided under section 80JJAA is a significant tax-break for taxpayers which are labour-intensive in nature and should be further liberalised.
1. 150 days for entities engaged in the business of manufacturing of apparel