Tax sops for new jobs: I-T dept’s interpretation of Section 80JJAA of I-T Act leaves staffing companies worried

The Bengaluru-based staffing firm has now filed an appeal against the assessment order of the I-T department.

In a recent order, disallowing deductions under Section 80JJAA of the I-T Act, 1961, the authorities held that the manpower service provider only had a forced/legal “employer-employee relationship” as it complied with statutory deductions like PF, ESI, gratuity, etc., but did not exercise control over its employees.

Under Section 80JJAA, on every new job added, a special deduction is allowed on the employer’s profit for computing tax, subject to fulfilling certain conditions. Staffing firms, which add thousands of jobs in the salary brackets the law stipulates, are one of the big beneficiaries of this provision.

In the case of this staffing company, the I-T authorities held that the “manpower hired/employed by the assessee company” did not work for it, but for its customers.

This assessment order comes months after the I-T authorities carried out a survey on Quess Corp in connection with the company’s claims under the same provision.

In the latest case, the assessing officer has contended that the main purpose of introducing the section was to generate employment. But in this case, the company only supplies manpower to its client to step into jobs created there, but does not create jobs on its own.

An email sent to the income-tax authorities seeking comment did not elicit a response till press time Tuesday.

The interpretation strikes at the core of labour law regulations and how the staffing industry works, said the finance head at a manpower company. “The tax authorities agree that the staffing companies are legal employers when it comes to statutory compliances. They are talking of a different concept called economic employer when it comes to deductions to deny the tax incentives,” he said.

“Such provisions in the law were meant to propel formal job creation at the entry level, thus encouraging the work done by outsourcing companies in this regard will enhance formalisation and jobs with social security schemes,” said Suchita Dutta, executive director at the Indian Staffing Federation in an email response to ET.

Lately, a large part of the formal workforce addition has come from service providers like the staffing companies, she said, urging the government to encourage the sector so that more people would shift into the formal workforce. The federation represents 98 manpower firms which together employ about 1.2 million people.

The law provides for tax breaks to companies for three years on each new job added with a monthly salary cap of Rs 25,000. The employee against whom the deduction is claimed, however, should have worked for a minimum of 240 days during the year in that organisation.