Budget 2018: As jobs remain big headache, govt looks at tax tweaks for fix

Job creation is one of Modi government's biggest challenges, with the Opposition using what it calls the government's poor performance in this regard as a stick to beat the prime minister's economic policies with. With Budget 2018 less than a month away, and with employment generation reportedly being a key theme this year, one way the government could give job creation a boost is by tweaking taxation laws to provide companies an incentive for hiring. 

India already provides tax benefits to incentivise job creation by companies. However, according to a Times of India report, certain lacunae in the rules have kept many companies, particularly from the services sector, from reaping the benefits of such incentives. In view of this, according to the national daily, the government could tweak Section 80JJAA -- which sets out conditions under which a company can avail of deductions in respect of employment of new employees -- of the Income Tax (I-T) Act or introduce some new provision. 

Under the Section, 30 per cent of the additional employee cost is available to the concerned company as a deduction for three years, including the year of hiring the new employee(s). Only companies having a turnover of Rs 10 million or more are eligible to claim benefits for any new employment created by them. The devil, however, is in the details. Among the Section's various conditions under which a new worker is not considered an additional employee, two in particular seem to have negatively impacted job creation, according to the national daily. Firstly, if a person is employed for less than 240 days in the first year of his employment with the concerned company, then he or she is not considered an additional or new employee. Only the textile sector enjoys a lower threshold of 150 days in this regard. Secondly, an employee whose total emoluments are more than Rs 25,000 per month is also not considered an additional employee -- the salary of such an employee is excluded when computing additional employee cost, against which the benefit is available.  

What are the possible remedies?

Experts have pointed out the difficulties such conditions pose. Speaking to the national daily, EY India partner & national tax leader Sudhir Kapadia explains that employees hired from August onwards are subject of "significant uncertainty" for the company as they cannot complete the stipulated 240 days in the first year of their employment. Therefore, Kapadia adds, companies have no incentive to hire after the month of July. However, Kapadia provides a remedy: "The condition of completion of 240 days by an employee should be tested in two consecutive years instead of only the first year. Thus, if the employee fulfils the condition cumulatively in the first two years of employment, the company should be allowed to claim the additional deduction from years two to four." 

Speaking to the national daily, P V Srinivasan, an industry veteran and practising chartered accountant, explains that the above-mentioned conditions pertaining to an employees' salary "largely disqualifies the service sector, including the information technology sector". It stands to reason that many new employees in such sectors are likely to be earning over Rs 25,000 per month, and as such, would not be counted as an additional employee when computing the company's additional employee cost. Ficci, for its part, has recommended that this limit should be increased to at least Rs 50,000 per month, the report added. Chipping in, Kapadia adds that the ceiling limit "does not address the normal increments over the next two years". Instead, according to him, "the limit of Rs 25,000 per month should apply only for the first year and be capped at Rs 50,000 in the next two years". 

Last but not the least, Srinivasan contends that instead of pushing for permanent employment, the government needs to facilitate fixed-term employment contracts, of three-year tenures for example. "This will be more in sync with the industry's changing needs and also help in employment generation," he explains. 

Budget 2018 may see India's first National Employment Policy

Tax tweaks are not the only measures being considered or taken by the government. As reported earlier, the government is likely to provide India with its first National Employment Policy (NEP) to address the crucial issue of job creation. The policy, which may be announced as part of Budget 2018, will have a comprehensive road-map outlined for all the employers and workers in a bid to create quality jobs across all sectors through economic, social and labour policy interventions. 

An official told another financial daily, "The policy will moot fiscal incentives for employers across labour-intensive sectors to create more jobs as well as employees to get engaged in the organized sector as this would fetch them minimum wages and enough social security."

Labour law tweaks on the plate

Apart from the NEP, the government is also looking to tweak labour laws -- both to benefit industry and boost employment generation. 

As reported earlier, the Union government has issued a draft notification to allow all businesses to offer fixed-term contracts to workers. This will enable industries to hire workers for short-term assignments and terminate their services once the projects are completed. Business Standard had reported on December 27, 2017, that the Ministry of Labour and Employment is contemplating bringing back a proposal to allow flexibility in hiring workers after receiving demands from various quarters of the industry. 

The government had allowed fixed-term employment only for the apparel manufacturing sector so far and had proposed to extend it to footwear, leather, and accessories sector workers in a decision taken by the Union Cabinet recently. The government had said that the move will help "attract large-scale investments at global scale".

Under fixed-term employment, workers are entitled to all statutory benefits available to a permanent worker in the same factory. The benefits include the same working hours, wages, and allowances. However, employers may not give notice to a fixed-term worker on non-renewal or expiry of his or her contract. In addition, employers can directly hire a worker for a fixed-term without mediation by a contractor.

 

"The move will particularly benefit in boosting employment in seasonal jobs. For instance, the manufacturing of air conditioners takes place in the pre-summer season... that will go up now," said M S Unnikrishnan, who co-chairs the Confederation of Indian Industry's (CII's) National Committee on Industrial Relations.