Read more about the GST and labour charges in this blog! It is surely going to help you a lot if you have been lately confused about the GST rates on labour charges.
Under the GST framework, a “service” is defined as any activity or transaction involving the use of money or its conversion from one form, currency, or denomination to another, regardless of whether or not a fee is collected for the service. For this reason, you may be pondering whether GST should be added to the cost of human labour charges. Read on to gain further insight into the topic.
Agreement Variations regarding GST
Before diving headfirst into the topic, a basic understanding of contracts that impose the GST on labour expenses is recommended.
Purpose-Only Employment Contract
A “pure employee contract” is one in which the work itself is the primary consideration. In this scenario, no physical assets are used to provide the service. Services agreements that only involve the provision of labour are subject to an 18% Goods and Services Tax unless they are exempt.
Contraction of Labor and Materials Agreement
The CGST Act defines works contracts as “essentially a contract of service that may involve the provision of commodities during the execution of the contract” (Section 2(119)). This means that the parties have settled on exchanging a mix of things and services, with the latter being the deciding factor. Contracts of this nature attract a Goods and Services Tax (GST) rate of either 12% or 18%, depending on the service’s nature.
Accounting for GST in Labor Cost Estimations by Using Supply Value
When computing GST on labour costs, the transaction value is based on the supply value. All taxes and fees imposed by various legislation are included, except the Central Goods and Services Tax, State Goods and Services Tax, and Individual Goods and Services Tax. The cost that the recipient is responsible for will be factored into the total value of the supply.
Take, for instance, a service provider as an example of a corporation whose actions could affect a customer. The beneficiary is handling the withholding of ESI and EPF instead of the employer. Such expenses must be included in the calculation of GST.
GST Exemptions for Labour Expenses
You may have noted that exceptions can be made to pure labour contracts in certain circumstances. The following are excluded from GST per Notification No. 12/2017 dated June 28, 2017:
- Services are provided by way of pure labour contracts for the construction, erection, commissioning, installation, fitting out, repair, maintenance, renovation, and alteration of any civil structure or other possible original works related to the beneficiary-led individual house construction or applicable enhancement under the Pradhan Mantri Awas Yojana or Housing for All (Urban) Mission; 1.
- Construction services for a single-family residence (as opposed to a multi-family complex) are often provided through pure labour contracts.
The exception above, however, does not apply if the supplier is responsible for the entirety of the construction project or if the project involves the construction of more than one unit.
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Discover the Facts About India’s GST Wage Tax
Can labour costs be subject to GST? Goods and Services Tax, or GST, must be paid on contracted labour services. When an owner and a contractor enter into a construction labour contract, the contractor agrees to carry out the project in exchange for the owner providing the required materials. In GST parlance, a contract whose sole consideration is labour costs is called a pure labour contract or works contract.
Agreements for Employment Come in a Wide Range of Forms:
- According to GST, a pure labour contract consists of only labour services. According to the HSN codes for information on labour charges, the service provider is prohibited from using client-provided resources.
If Mr Raj hired Mr Shyam to build his house, that would be an example of a pure labour contract. Mr Raj will supply the materials, while Mr Shyam will provide the labour and insist that his equipment be used solely. GST applies to the provision of workforce services.
- Second, a contract for the provision of both materials and labour: What is commonly referred to as a “works contract” in the goods and services tax (GST) context refers to a contract for the supply of materials and the provision of labour. A works contract is defined as it is today in Section 2(119) of the 2017 CGST Act.
- In addition, it stipulates that the delivery of labour services must be the primary emphasis of any contract that includes the supply of commodities and labour. The GST rate applicable to labour supply services applies here as well.
Therefore, M Raj engages Mr Shyam to build his house for him under a works contract. According to the agreement provisions, Mr Shyam will now be responsible for delivering all essential building materials such as cement, sand bricks, etc., as well as his crew, tools, machinery, etc., finishing the construction. Possible scenarios include Mr Raj providing the sand and bricks and Mr Shyam only providing the labour and cement, with a 9-month deadline for completion.
Income Tax versus Labour Cost:
Value-added, excise and service taxes would have been levied against a worker’s wage or salary under the previous system. After GST was introduced, these three taxes were consolidated into a single GST tax applied to the relevant HSN codes for labour.
Remember that a works contract may involve delivering goods and services. Service tax regulations typically count labour at about 40% of the total contract value.
Following the implementation of GST apply online, the total tax due on Rs 10,000 dropped from Rs 23,50 to Rs 1800, as seen in the preceding computation. The final sales price has also dropped, from Rs 12350 to Rs 11800. Another significant advantage of GST is that input tax credit can be claimed on all raw materials purchased under the works contract.
Taxes on goods and services (GST) must be included in labour prices.
Every agreement for providing services or hiring workers is subject to GST unless otherwise indicated in a notification approved by the GST Council. All monetary transactions for services are covered by GST on labour contractors or under the GST Act, except the purchase or sale of securities, the exchange of money to convert deposits, etc.
In the case of a pure labour contract, GST applies to the delivery of labour services, such as the provision of workers to fulfil the contracted task or the supply of the labour force. Pure works and labour contracts have their quirks and considerations, which are discussed here.
Types of Labour Contracts
There are 2 kinds of labour contracts:
- A labour contract containing only labour service: Under this kind of labour contract, the beneficiary and the contractor/service provider provide just labour services. As stated in the Labour HSN code charges information, the service provider is not permitted to use any items that they purchased while providing labour in this instance.
Let’s use an example to better grasp this. When Mr. A contracts Mr. X to build a building on his property under a pure labour contract, Mr. X utilises his own tools and machinery and provides labourers for the allotted task, while Mr. A supplies materials like bricks, cement, and other building supplies. GST will only be charged on the labour that is supplied.
- A labour contract containing material supply and labour: A ‘works’ contract is the word used to describe this kind of labour agreement as per U/S 2(119) of the 2017 CGST Act. The primary component of the contract is the composite provision of labour services in addition to materials. GST rates are still in effect for services involving the supply of labour.
We can use the earlier example. The difference is that Mr. X supplies all of the labour, equipment, and materials needed by them, such as sand, cement, bricks, and other things.
How is Labour Charges GST Rate calculated?
The GST Act states that the transactional value is used as the supply value when calculating the GST on labour charges. With the exception of CGST, IGST, and SGST, all costs, levies, and taxes imposed under various statutory legislation are included in this transactional value. At first, the person receiving the service bears certain costs instead of the person providing the labour. The overall supply value for these services must be increased, and the following formula is used to determine the GST rate on labour charges:
Basic amount for labour supply -₹100
A service charge at 10% on 100- Rs.10
EPF- ₹12
ESI- ₹4.75
Total- ₹126.75
GST is charged on the total amount- ₹22.8 (126.75*18%)
Implications of GST on Labour Contractors
There are two scenarios
- If the labour contractor is registered for GST: The supplier agency may charge GST for labour supply if it is registered for GST. Furthermore, for the same, it is eligible to claim the input tax credit.
- In the event that the labour contractor is not GST registered, the service recipient is required to charge GST using the reverse charge mechanism.
Comparison of after-tax labour charges
Pre-GST, excise, VAT and service tax was charged on labour charges. But, post-GST, all three taxes got subsumed under GST. Price comparison of labour charges pre and post GST is shown below:
| 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 |
Note: A composite supply of products and services are involved in a works contract. The tax was paid at 15% up to 40% of the total contract value under the service tax regulations.
Therefore, the sale consideration is lower now that GST is in place. ITC will also be offered for purchased raw materials.
What is the GST Rate with the HSN Code on Labour Charges?
| Service Accounting 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% |
Subtract the Cost of Labour From the Value of Supplies to Arrive at the Total GST
The supplied value must be considered when determining the amount of GST applied to labour expenses, as stipulated by the GST Act. Except for the Central Goods and Services Tax (CGST), the State Goods and Services Tax (IGST), and the Local Goods and Services Tax (LGST), all fees, tariffs, and taxes imposed by applicable legislation usually are included in the value of a transaction (SGST). The contracting party must pay various charges associated with the labour contractor and his supplies before the contract can go into effect. Therefore, these expenses must be factored into the actual store or transactional value.
Let’s have a look at an example for clarity. Consider the hypothetical situation where Mr Shyam, the labour provider, and Mr Raj enter into a contract based only on the exchange of services for compensation. By the terms of the agreement, Mr Shyam shall supply the labour necessary to complete the work. Though Mr Raj is obligated to pay ESI and EPF on behalf of Mr Shyam, Mr Shyam does not do so. How much Goods and Services Tax (GST) should be added, and what other fees should we factor in?
- Let’s say the minimum wage in your location is = Rs.10000.
- In this scenario, the service fees amount to Rs.1000 (10% of Rs.10,000).
- A 12% deduction from EPF earnings equals Rs.1200.
- For ESI, the necessary reduction is Rs. 475.00.
- The current sum spent is = 12,675 Indian Rupees.
If we multiply that by 18% (or 0.2281.5), we get the whole GST due: (12675 * 0.2285).
Conclusion
Service providers can classify their activities by the legislation if they know the GST on labour charges. On top of that, it will make the route to compliance easier and ensure that it is followed. Consumers can also profit from this tax system thanks to the above information, which will notify them of the instances under which GST on labour charges is exempt. Vakilsearch can help you with all the problems you face.
