GST on Labour Charges: Types of contract, Calculation, HSN Code, Implications & Exemptions

In India, since the advent of the GST regime in 2017, the taxation system has become quite structured. It eliminated multiple taxes, and a single tax system replaced it, making it easier for all to comprehend the taxation process. As the name says, the GST, i.e., Goods and Services Tax, is applicable to all goods you buy and the services you avail.

 

When you talk about services, it also includes the manpower services offered by many businesses and individuals. For the services they provide, they levy certain charges, which can be considered labour charges. This could be anything from housekeeping to security, driving and gardening. Knowing how GST applies to the labour charges is important for both parties – the service provided and the recipient of the service.

 

Before we discuss GST on labour charges in India in detail, let us first understand the type of labour contracts in India.

 

In India, there are two kinds of labour contracts –

 

• Labour contract with only labour services

   

  This type of labour contract involves only labour services between the service provider and the one receiving their service. In this contract, the service provider is not permitted or eligible to use any materials that the procure during the provision of labour as mentioned in the labour charges HSN (Harmonised System of Nomenclature) code details.

   

  Let us understand better with an example.

   

  Let’s say Mr. Anirudh Ahuja hires Mr. Nitin Agarwal to construct an office building on land that he owns, and they establish a pure labour contract. In this case, Mr Agarwal will provide labour support and service for the building task and use his own tools and machinery for the building's purpose. Whereas, Mr. Ahuja will provide Mr. Agarwal with the building materials like bricks, cement, steel, etc.

   

  In this instance, when Mr Nitin Agarwal raises an invoice for the labour services he provided, the GST will be applied only to the manpower provided.

   

• Labour contract with labour services and material supply

 

As per Section 2(119) of the CGST Act of 2017, this type of labour contract is termed a Work Contract. It involves the supply of both labour services and material, but the labour services are the main part of the contract.

 

Even in this type of contract, GST applies only to the manpower services offered by the service provider.

 

Continuing with the same example as above. If Mr Ahuja hires Mr Agarwal under the Work contract, then Mr Agarwal will provide everything, including the labour services, i.e., manpower services, the tools and equipment, as well as the building materials.

 

How is GST on labour charges calculated?

 

According to the GST Act, the GST on labour charges is calculated by using the transactional value as the supply value. Then transactional value entails all the expenses incurred by the service providers, the duties involved, and the taxes levied under different statutory laws, except CGST, IGST, and SGST.

 

At first, all the expenses are to be borne by the individual or the entity receiving the service instead of the person or entity providing the labour, i.e., manpower services. These types of services must be added to the total supply value, and then the GST rate on the labour charges must be calculated as mentioned below:

 

The basic charges for supplying labour - Rs. 100

Service charges @ 10% on 100 - Rs. 10

EPF (Employee Provident Fund) - Rs. 12

ESI (Employee State Insurance) - Rs. 4.75

The total amount comes to Rs. 126.75

 

The GST will be calculated on this total amount of @18%. So, the GST calculation will be

 

126.75 x 18% = Rs. 22.8

 

Now that you know how the GST is calculated on the labour charges, you must also know about the HSN code for labour charges.

 

The HSN code for labour charges is also commonly referred to as the accounting code. The GST rates for labour contracts for different types of services are different, and each type of service has a unique HSN code. The following table will give you a clear idea about the HSN code for different labour services and the corresponding GST rate for the same.

 

The type of services provided	HSN Code	Applicable GST Rate
Executive personnel search services	998511	18%
Permanent placement services	998512	18%
Contract staffing services	998513	18%
Long-term staffing or payroll services	998515	18%
Temporary to permanent staff placement services	998516	18%
Co-employment staffing services	998517	18%
Labour supply services that is not classified anywhere	998518	18%

 

 

 

 

GST Implications on Labour Contractors

 

To understand the GST implication on labour contractors, you must be aware of two scenarios.

 

Scenario 1 – When the labour contract service provider is registered under GST

 

If the labour service provider or the agency is registered under GST, then the provider will be eligible to charge GST for supplying their labour services. Additionally, they can claim the input tax credit for the same.

 

Scenario 2 – When the labour contractor is not registered under GST

 

In this situation, the person or entity receiving the labour service must charge GST under the reverse charge mechanism.

 

Is there any tax exemption on GST labour charges in India?

 

Yes, there are certain GST exemptions for labour charges under specific conditions. These exemptions apply to commissioning, erection, construction, and other related service providers under the pure labour contract.

 

The labour charges associated with home construction, renovation, or repair under government schemes like PMAY (Pradhan Mantri Awas Yojana) and Housing for all Schemes are exempt from GST on labour charges.

 

Final Word

 

As a business owner, if you equip yourself with the knowledge of GST on labour charges, you can easily and correctly categorise the services you provide under the GST rules. This, in turn, will ensure that you don’t feel burdened about the potential of paying any penalties. Also, with this knowledge, you can calculate the GST precisely for the labour supply services you provide and keep the business operations running smoothly.