Continuing the legislative policy of incentivizing employment generation : Clause 146 of Income Tax Bill, 2025 vs. Section 80JJAA of Income Tax Act, 1961

Clause 146 Deduction in respect of additional employee cost.

Income Tax Bill, 2025

Introduction

Clause 146 of the Income Tax Bill, 2025, introduces a statutory deduction in respect of "additional employee cost" for businesses, continuing the legislative policy of incentivizing employment generation. This provision, in essence, seeks to reward businesses that expand their workforce by offering a tax deduction of 30% of the additional employee cost for three consecutive tax years. The clause is a successor to and, in several respects, a re-enactment of Section 80JJAA of the Income-tax Act, 1961, which has been the cornerstone for such deductions for over two decades. The mechanism for compliance and reporting under this deduction is further detailed in Rule 19AB of the Income-tax Rules, 1962, which prescribes the form and manner of the accountant's report required to claim the deduction.

This commentary provides a comprehensive analysis of Clause 146, examining its objectives, operative provisions, and practical implications. It then undertakes a granular comparison with Section 80JJAA of the Income-tax Act, 1961 and Rule 19AB of the 1962 Rules, highlighting similarities, differences, and the legislative evolution. The discussion also considers interpretative challenges and compliance burdens, concluding with insights into the future direction of employment-linked tax incentives.

Objective and Purpose

The legislative intent behind Clause 146 is to promote formal employment by providing a fiscal incentive to businesses that increase their workforce. The deduction is designed to:

• Encourage job creation in the formal sector;
• Disincentivize cash-based or informal employment practices by requiring emoluments to be paid through traceable banking channels;
• Promote long-term employment by restricting the deduction to employees who meet certain tenure thresholds;
• Ensure that the incentive is not misused in cases of business restructuring, transfer, or mere reorganization;
• Align with government policy objectives of inclusive economic growth and formalization of the labor market.

Historically, similar provisions have been introduced and refined since the late 1990s, reflecting the government's evolving approach to labor market interventions via tax policy. The shift from "additional wages paid to new workmen" to "additional employee cost" and the expansion to various sectors and business forms underscore the intent to make the incentive more inclusive and effective.

Detailed Analysis of Clause 146

1. Eligibility and Scope - Sub-sections (1) and (2)

Clause 146(1) applies to any assessee to whom Section 63 applies and whose gross total income includes profits and gains from business. The deduction is set at 30% of the "additional employee cost" incurred during the tax year. Sub-section (2) allows this deduction for three consecutive tax years, beginning with the year in which the employment is provided.

• Scope of Assessee: The provision is broad, extending to all assessees with business income, subject to compliance with Section 63 (which likely pertains to audit requirements, akin to Section 44AB of the Income-tax Act, 1961).
• Quantum and Duration: The deduction is substantial-30% of the additional employee cost for three years-making it a significant incentive for businesses to hire additional employees.

2. Conditions for Allowance - Sub-section (3)

Deduction is denied if:

• The business is formed by splitting up or reconstruction of an existing business;
• The business is acquired by transfer or business reorganization;
• The assessee fails to furnish the prescribed accountant's report before the specified date.

These conditions are designed to prevent abuse of the provision by businesses that merely restructure or transfer existing operations without generating genuine new employment. The requirement for an accountant's report ensures a degree of third-party verification and compliance.

3. Exception for Revival - Sub-section (4)

An exception is carved out for businesses revived u/s 140(4) (presumably analogous to Section 33B of the Income-tax Act, 1961), allowing them to claim the deduction notwithstanding the splitting up or reconstruction restriction. This supports the policy of reviving sick industrial units.

4. Definitions and Exclusions - Sub-section (5)

a) Additional Employee Cost

Defined as the total emoluments paid/payable to additional employees during the tax year, or in the first year of a new business, all emoluments paid/payable to employees in that year. For existing businesses, the additional employee cost is nil if:

• There is no increase in the number of employees compared to the preceding year; or
• Emoluments are paid otherwise than by account payee cheque/draft, electronic clearing, or prescribed electronic modes.

b) Additional Employee

An "additional employee" is one whose employment increases the total number of employees as on the last day of the preceding tax year, but excludes:

• Employees with emoluments exceeding Rs. 25,000 per month;
• Employees for whom the government pays the entire Employees' Pension Scheme contribution;
• Employees employed for less than 150 days (apparel/footwear/leather sectors) or 240 days (other sectors), with a carry-forward provision for those who meet the threshold in the succeeding tax year;
• Employees not participating in a recognized provident fund.

c) Emoluments

"Emoluments" cover all sums paid or payable to an employee for employment, but exclude:

• Employer contributions to pension/provident or other employee funds;
• Lump-sum payments at termination, superannuation, or voluntary retirement (e.g., gratuity, severance, leave encashment, commuted pension).

5. Compliance and Reporting

A deduction is contingent upon furnishing a report of an accountant before the specified due date, with particulars as prescribed (likely by rules akin to Rule 19AB and Form 10DA).

Practical Implications

• For Businesses: The provision offers a significant tax incentive, especially for labor-intensive sectors. However, it imposes strict compliance requirements, including payroll documentation, adherence to payment modes, and timely reporting.
• For Employees: The provision indirectly promotes formal employment, provident fund participation, and discourages high-turnover or short-term contracts.
• For Tax Administration: The provision demands robust verification and audit mechanisms, as the risk of inflated or fictitious employment claims is non-trivial.

Comparative Analysis with Section 80JJAA of the Income-tax Act, 1961

1. Structure and Scope

Both Clause 146 and Section 80JJAA provide for a 30% deduction of additional employee cost for three years. The eligibility conditions, quantum, and duration are substantially similar. However, certain drafting nuances and references differ, reflecting legislative modernization.

• Applicability: Section 80JJAA applies to assessees subject to Section 44AB (tax audit), while Clause 146 refers to Section 63 (presumably the corresponding audit provision in the new Bill).
• Business Types: Both provisions are agnostic to business type, covering all businesses with profits and gains.

2. Conditions and Exclusions

• The anti-abuse conditions (splitting up, reconstruction, transfer, reorganization) are identical in both provisions.
• The exception for revival of business (Section 33B in 80JJAA; Section 140(4) in Clause 146) is maintained, ensuring parity in policy for sick unit revival.
• The requirement for an accountant's report, with particulars as prescribed, is present in both, though references to the relevant sections/rules differ due to the legislative framework.

3. Definitions

a) Additional Employee Cost

The definition and computation are nearly identical. Both provide that in the first year of a new business, all emoluments are treated as additional employee cost. For existing businesses, the cost is nil if there is no increase in employees or if emoluments are not paid through prescribed banking channels.

b) Additional Employee

The exclusion criteria for additional employees are the same:

• Emoluments exceeding Rs. 25,000 per month;
• Government fully pays Employees' Pension Scheme contribution;
• Tenure less than 240 days (or 150 days for specified sectors), with the carry-forward/deeming provision;
• Non-participation in recognized provident fund.

The only minor difference is the drafting style and explicit referencing to the relevant sections.

c) Emoluments

Both definitions are identical in substance, excluding employer contributions to funds and lump-sum terminal payments.

4. Sectoral Relaxation

Both provisions provide a relaxation for the apparel, footwear, and leather sectors by lowering the minimum days of employment from 240 to 150. The carry-forward mechanism for employees who meet the threshold in the succeeding year is also identically worded.

5. Compliance

Both provisions require an accountant's report, though the reference to the definition of "accountant" and the manner of furnishing the report may differ due to changes in the corresponding sections and rules in the new legislation.

6. Notable Differences

• Section References: Clause 146 updates references to audit and revival sections, aligning with the new Bill's numbering and structure.
• Drafting Clarity: The new clause is more succinct and modern in its language, potentially enhancing interpretative clarity.
• Potential for Further Prescription: Clause 146 refers to "such other electronic mode as prescribed," leaving room for the rules to expand acceptable payment modes in the future, reflecting technological advancements.

Comparative Analysis with Rule 19AB of the Income-tax Rules, 1962

1. Purpose and Content

Rule 19AB prescribes the form and manner in which the accountant's report (Form 10DA) must be furnished to claim the deduction u/s 80JJAA. The rule is procedural, not substantive, but is critical for compliance.

2. Reporting Requirements

• The report must be in Form 10DA, containing particulars about the additional employee cost, number of employees, emoluments paid, and compliance with all statutory conditions.
• The report must be furnished along with the return of income, before the specified due date.

3. Alignment with Clause 146

Clause 146, while not prescribing the form, requires the furnishing of an accountant's report "as prescribed." It is expected that rules under the new Bill will mirror Rule 19AB, prescribing a similar (or updated) form and content for the report. The rationale and compliance burden remain the same.

4. Compliance Implications

• For Assessees: The requirement for a detailed accountant's report imposes a documentation and verification burden, necessitating robust payroll and HR systems.
• For Accountants: The reporting obligation requires careful verification of eligibility, quantum, and compliance with all conditions, increasing professional responsibility and potential liability.
• For Tax Authorities: The standardized report facilitates easier verification and audit of claims, helping prevent abuse.

5. Potential Issues and Ambiguities

• Interpretation of "Additional Employee": Determining whether an employee truly increases the workforce may be complex in cases of attrition and re-hiring.
• Mode of Payment: With evolving payment technologies, the definition of "prescribed electronic modes" may require periodic updating.
• Overlap in Tenure Calculation: The carry-forward provision for employees who cross the tenure threshold in the succeeding year may create administrative complexity.

Conclusion

Clause 146 of the Income Tax Bill, 2025, represents a continuation and refinement of the employment-linked deduction regime established u/s 80JJAA of the Income-tax Act, 1961. The provision is well-calibrated to incentivize genuine job creation, with robust anti-abuse safeguards and compliance requirements. Its alignment with the existing legal framework ensures continuity and familiarity for taxpayers and practitioners, while updated drafting and references accommodate legislative modernization.

The practical impact of Clause 146 will depend on the clarity of rules to be prescribed (especially regarding reporting and acceptable payment modes), the capacity of businesses to comply with documentation requirements, and the vigilance of tax authorities in verifying claims. As the economy and labor market evolve, further refinements may be necessary to address new forms of employment and payment, and to ensure the incentive continues to serve its intended purpose of fostering formal, long-term employment in India.

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Full Text:

Clause 146 Deduction in respect of additional employee cost.

 

Dated: 18-4-2025