Goods and Services Tax (GST) is a comprehensive tax system that applies to both goods and services, including labour charges. Understanding how GST rates in 2024 are applied to labour charges in India is crucial for businesses and individuals alike.
This article will delve into the specifics of GST on labour charges, providing clarity on its applicability, the different types of services affected, and how to calculate the tax accurately.
By the end of this guide, you’ll have a clearer understanding of how GST impacts labour-related services and how to ensure compliance with the tax regulations.
Related Read: Find Latest List of Goods and Service Tax (GST) Rates
Table of Contents
How is GST on labour charges classified?
GST on labour charges is generally classified under the following categories
1. Pure Labour Contract
A pure labour contract under GST refers to a scenario where the service provider supplies only the labour, while the recipient provides the materials.
For example, in the construction of a building, if a contractor is hired solely for their skilled labor without supplying any materials, this would be considered a pure labour contract.
2. Works Contract (Labour + Materials)
A works contract, as defined under Section 2(119) of the CGST Act, 2017, involves a composite supply of labour services and materials. In this type of contract, the supply of services is the predominant element.
For instance, if a contractor undertakes construction work by supplying both labour and materials, it qualifies as a works contract.
How is the GST Rate Calculated on Labour Charges?
Under the GST Act, GST on labour charges is calculated based on the transactional value, which includes all relevant expenses except CGST, IGST, and SGST.
- Basic Amount for Labour Supply: ₹1500
- Service Charges (10% on ₹1500): ₹150
- EPF: ₹12
- ESI: ₹4.75
Total Supply Value = 1500 + 150 + 12 + 4.75 = 1666.75
GST Amount = 1666.75 × 18% = 300.03
GST on Labour Services and their HSN Code
As per GST guidelines, here is a list of GST-exempt labour services.
List of Labour Services with 0% GST Rate
HSN Code |
Service Description |
GST Rate on Labour Charges |
| 9986 | Supply of farm labours | Nil |
| 9954 | Pure labour contracts for individual house construction or for projects under the Housing for All (Urban) Mission or Pradhan Mantri Awas Yojana. | Nil |
| 9954 | Pure labour contracts for commissioning for a single residential unit (not part of a residential complex) | Nil |
| 9954 | Pure labour contracts for installation for a single residential unit (not part of a residential complex) | Nil |
| 9954 | Pure labour contracts for completion for a single residential unit (not part of a residential complex) | Nil |
| 9954 | Pure labour contracts for fitting out for a single residential unit (not part of a residential complex) | Nil |
| 9954 | Pure labour contracts for repair for a single residential unit (not part of a residential complex) | Nil |
| 9954 | Pure labour contracts for maintenance for a single residential unit (not part of a residential complex) | Nil |
| 9954 | Pure labour contracts for renovation, or alteration of a civil structure under Housing for All (Urban) Mission or Pradhan Mantri Awas Yojana | Nil |
| 9995 | Labour for activities relating to the welfare of industrial or agriculture | Nil |
Read More About: List of Goods and Services Exempt Under GST
Labour Services with 18% GST Rate and Their HSN Code
Here is the list of labour services that attract an 18% GST rate.
HSN code |
Nature of service |
GST rate for labour charges |
| 998511 | Executive/retained personnel search services | 18% |
| 998512 | Permanent placement services | 18% |
| 998513 | Contract Staffing Services | 18% |
| 998515 | Long- Term staffing or payroll services | 18% |
| 998516 | Temporary staffing-to-permanent placement services | 18% |
| 998517 | Co-employment staffing services | 18% |
| 998518 | Other employment and labour supply services nowhere else classified | 18% |
GST on Labour Charges: Pre-GST vs Post GST
Before GST, labour charges were subject to excise, VAT, and service tax. However, with the introduction of GST, these three taxes were combined into a single tax system.
Below is a comparison of labour charges before and after the implementation of GST.
Particulars |
Pre-GST |
Post-GST |
| Total cost (material +labour) (A) | 100 | 100 |
| Excise at 12.5% (B) | 12.5 | — |
| Service tax at 15% on (40% of 100) (C) | 6 | — |
| VAT at 5% of A (D) | 5 | — |
| GST at 18% of A (E) | — | 18 |
| Total sale consideration (A+B+C+D+E) | 123.5 | 118 |
GST on Manpower Supply Services
Manpower services such as drivers, clerical staff, security, and housekeeping are subject to an 18% GST rate, applicable to both private and government entities. However, services provided to Panchayats or Municipalities under Articles 243G and 243W of the Indian Constitution are exempt from GST. For example, drivers and cleaners for waste management or staff in government-run hostels and schools do not incur GST.
Implications of GST on Labour Contractors
Scenario 1: Labour Contractor Registered under GST
If a labour contractor is registered under GST, they are authorized to charge GST on the labour supply services they provide. Additionally, the contractor can claim an input tax credit (ITC) for the GST paid on inputs and services used to deliver these labour services. This means that the GST paid on purchases related to the provision of labour services can be offset against the GST collected from clients.
Scenario 2: Labour Contractor Not Registered under GST
If a labour contractor is not registered under GST, the responsibility to charge GST shifts to the service recipient. In this case, the recipient must apply the reverse charge mechanism, which means they are required to pay the GST directly to the government rather than the contractor.
Exemptions available on GST Labour Charges in India
Certain services under pure labour contracts are exempt from GST as specified in Notification No. 12/2017 dated June 28, 2017. These exemptions include:
1. Construction of Single Residential Units
Services related to the construction, erection, commissioning, or installation of original works for a single residential unit, provided it is not part of a residential complex.
2. Housing for All (Urban) Mission or Pradhan Mantri Awas Yojana
Services related to the construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of civil structures or original works for individual house construction or enhancement under these housing schemes.
However, these exemptions do not apply if the supplier handles the entire construction project, including labour, or if the construction involves multiple units.
Conclusion
Understanding GST on labour charges is crucial for correctly categorizing services under the applicable GST rules, which helps in avoiding potential penalties. Familiarity with GST ensures accurate calculation of tax on labour supply, thereby facilitating smooth business operations. By grasping these rules, businesses can ensure compliance and maintain efficiency, preventing errors that could lead to legal issues or financial setbacks. Knowledge of GST not only streamlines accounting processes but also supports effective management of tax obligations, ultimately contributing to the overall success and reliability of business operations.
Frequently asked questions
1. What is the GST registration limit for labour contractors?
Labour contractors must register for GST if their aggregate turnover exceeds ₹20 lakh (₹10 lakh for special category states) in a financial year. This threshold applies to the total value of all supplies, including exempt supplies. Contractors with turnover below this limit are not required to register but may choose to do so voluntarily.
2. What is the RCM of labour charges under GST?
Under the Reverse Charge Mechanism (RCM), if a labour contractor is not registered under GST, the service recipient must pay the GST directly to the government. The recipient is responsible for calculating and remitting the GST, rather than the contractor.
3. Who will pay GST on the works contract?
For works contracts, GST is typically paid by the contractor who provides both labour and materials. However, if the contractor is not registered under GST, the responsibility to pay GST shifts to the service recipient under the reverse charge mechanism.
4. Do labour contractors need to register for GST?
Labour contractors need to register for GST if their aggregate turnover exceeds ₹20 lakh (₹10 lakh for special category states) in a financial year. If their turnover is below this threshold, registration is optional but recommended for claiming input tax credits and ensuring compliance.
5. What’s the GST Rate for Pure Labour Contracts?
The GST rate for pure labour contracts is generally 18%. This applies to various types of labour services, including construction and maintenance, provided they are not covered under any specific exemptions.
6. How Does GST Affect Labour Contractors?
GST requires labour contractors to register if their turnover exceeds ₹20 lakh. Most contracts attract an 18% GST rate. Contractors can claim input tax credits for related expenses, which helps reduce tax liabilities. Compliance is essential, as they must maintain records and file returns regularly. Some labour services may be exempt, so contractors should be aware of applicable exemptions.
7. What is the Difference Between a Works Contract and a Pure Labour Contract in GST?
- Works Contract: Involves both goods and services, such as construction projects, and is taxed at 18% GST.
- Pure Labour Contract: Involves only labor services without transferring goods, often attracting a lower GST rate or exemption.
- Input Tax Credit: Available for works contracts but typically not for pure labour contracts.
