GST on labour charges
Goods and Services Tax is a comprehensive tax framework that applies to both goods and services, including labour charges in India. This is integral for businesses as well as contractors to ensure tax compliance and avoid any potential penalties. In this regard, knowing the specific aspects of GST on labour charges, types of labour contracts, calculation methods, and exemptions, is the key to ensuring long-term compliance.
Types of labour contract
There are two main types of labour contacts as per their GST applicability. These are as follows:
Pure labour contract: In this type of labour contract, the service provider supplies only labour, while the recipient provides all required materials. For example, if a contractor is hired solely to provide labour for a building construction project without supplying materials, it is considered to be a pure labour contract.
Works contract (labour + materials): Defined under Section 2(119) of the CGST Act of 2017, this contract includes both labour services and materials, with labour being the primary element. For example, a contractor who supplies both labour and materials for construction work enters into a works contract.
How is labour charges GST rate calculated
The GST rates on labour charges are calculated based on the total value of the transaction which includes all associated costs except for CGST, IGST, and SGST. Here is a simple example to illustrate this calculation process:
Basic labour supply cost = Rs. 1,500
Service charges at 10% on Rs. 1,500 = Rs. 150
EPF and ESI contributions = Rs. 12 + Rs. 4.75 = Rs. 16.75
Total supply value = Rs. 1,666.75
Total GST amount = Rs. 1,666.75 × 18% = Rs. 300.03
For a better understanding of this calculation, it is recommended that you use a GST calculator to estimate your tax obligations accurately.
Applicability of GST on labour charges
GST is applicable on labour contracts where the service provider is registered under the prevalent GST regime. Businesses with an annual turnover exceeding Rs. 20 lakh are required to register for GST, enabling them to charge GST and claim input tax credits, as applicable. However, if a contractor is unregistered, the service recipient is responsible for paying GST via the reverse charge mechanism.
What is the value of supply to compute GST on labour charges
The taxable value of supply to compute GST on labour charges includes all direct and indirect expenses such as labour costs, service charges, and other contributions. This value of supply provides businesses with a baseline figure to facilitate easier GST calculation and maintain compliance with the existing GST regulations.
Labour HSN code and GST rates
HSN codes help classify labour services under specific GST rates. Here is a simple breakdown of some applicable HSN codes and their subsequent GST rates for labour charges:
| HSN code | Service description | GST rate |
| 9986 | Supply of farm labour | Nil |
| 9954 | Pure labour contracts for single residential units | Nil |
| 998511 | Executive/retained personnel search services | 18% |
| 998512 | Permanent placement services | 18% |
| 998515 | Long-term staffing or payroll services | 18% |
| 998518 | Other employment and labour supply services not classified | 18% |
Note about GST on import of labour
GST on imported labour services usually applies under the reverse charge mechanism, where the recipient of the service in India is liable to pay the applicable GST directly to the government. This is important for businesses hiring foreign labour or contracting international service providers.
Exemptions accessible on GST for labour charges
Certain labour services are exempt from the application of GST as per Notification No. 12/2017. These include the following:
Construction of single residential units: Labour contracts that include single residential units which are not a part of residential complexes are exempt from GST.
Housing for all initiatives: Services related to construction, maintenance, or alteration of structures under government housing schemes such as the Pradhan Mantri Awas Yojana are also exempt from GST.
Conclusion
The introduction of the Goods and Services Tax has streamlined the taxation on labour charges. It directly affects labour charges and this impact varies based on the type of labour contract drawn up, applicable exemptions, etc. In this regard, businesses must review and keep themselves apprised of any updates or changes to this GST regime to avoid penalties and ensure continued compliance in the long run. Moreover, for financing needs, explore business loan options that can support compliance and growth.
