Employment generating companies in the service sector are likely to get a boost in the forthcoming Budget in the form of tax incentives. This can be through a tax benefit, which will be in proportion to the number of new jobs created by companies, said an official with the income-tax department.

At present, the manufacturing sector gets a tax incentive for all additional jobs it creates every year. The government now wants to spread the benefit to companies in the service sector, too. The incentive, currently, is a deduction of 30% of the amount paid as wages to newly-recruited regular workmen. These incentives are provided for the manufacturing sector under Section 80 JJ AA of the I-T Act.

Under the provision, companies are allowed to claim a deduction for three years subsequent to the appointment of 100 or more new workmen. The government’s proposal is similar to incentive structures that some of the EU countries have. While a tax incentive linked to employment can be misused, the benefits, it’s perceived, may be far reaching.

Advocates of such an incentive argue that a higher employment generation creates a virtuous cycle through greater demand, which in turn pushes up a country’s national income. The service sector accounted for 52.4% of the total GDP in 2006-07 at current prices. Estimates are that the share has increased to around 54% for 2008-09. In recent years, telecom firms, BPOs and financial services company have emerged as big employers in the country.

The sector, according to the government’s definition, is categorised as : (a) Trade, hotels, transport and communication; (b) Financing, insurance, real estate and business services; and (c) Community, social and personal services. Of this, ‘trade, hotels, transport and communications’ generate half the income in the service sector.