Explore the intersection of GST on Labour Charges and the essential HSN Code for Labour Charge in our concise guide. Uncover the tax implications and coding nuances for a comprehensive understanding of these crucial aspects in financial transactions.
In the language of construction, a labour contract is a formal agreement between two parties wherein the contractor undertakes to perform work subject to specific restrictions and terms, and the owner provides the materials necessary to carry out the contract. The GST refers to this contract as pure labour and works contract. Let’s see the details on GST on Labour Charges.
Types of Labour Contracts
Following are the types of labour contracts.
Pure Labour Contract
In terms of GST, a labour agreement that simply includes labour services is referred to as a labour agreement. Per the terms of such a contract, the service provider is not allowed to use any materials they have purchased in the course of providing the labour service as specified in the HSN code for labour charge.
A Labour Agreement That Includes Both Labour and Material Supply
In terms of the GST, a labour agreement of this type that covers both labour and material supply is known as a works contract. The works contract is defined in Central Goods and Service Tax 2017 Section 2(119) of 2017. Additionally, it states that a contract governing such a composite supply of materials and labour, with labour services being the bulk of the contract, must have this clause. The same GST on labour charges on services related to staffing is in effect here.
GST on Labour Charge in India
All services and employment agreements are subject to GST unless specifically exempted by a notification approved by the Government and the GST Council. All financial transactions, except those involving securities or money, moved for the conversion of securities, etc., are included in services covered by the GST on labour charges contractors or by the GST laws.
In a pure labour agreement, the GST on labour charge supply applies to the provision of labour services, such as hiring individuals to perform the task specified in the contract or providing a labour force. Additional considerations and exemptions exist for the pure labour contract and the pure works contract.
Applicability of GST on Labour Charges
GST applies to all services unless specifically exempted by a notification or law. This includes the supply of services through labour. Essentially, any transaction involving the provision of labour services, such as construction, repair, or maintenance, is subject to GST. However, services related to money, securities, or currency conversion by cash or other modes are not included under GST.
The specifics of labour contracts and exemptions under pure works contracts are covered in other sections. It’s essential to understand that GST on labour charges is part of a broader regulatory framework aimed at standardising the taxation of services across different sectors. Businesses and service providers need to be aware of these regulations to ensure compliance and avoid penalties. By understanding the applicability of GST, businesses can effectively manage their tax obligations related to labour charges.
How to Calculate GST on Labour Charge?
According to the GST Act, 2017, the transactional value is used as the supply value to calculate the GST on labour charges. Except for CGST, IGST, and SGST, the transaction value typically denotes the whole worth of the transaction, including all costs, charges, and taxes imposed by various statutory regulations. In reality, the party entering into a labour contract is responsible for paying several costs on behalf of the labour contractor and his supplies. Therefore, it is only fair to include these fees to determine the transactional or actual supply value.
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GST’s Effects on Labour Contractors
In the case of labour contractors, two possible outcomes are provided in more detail below.
If the Labour Contractor Has a GST Registration
If the labour contractor or supply agency has a GST registration, they must add GST to any labour contract services they provide. Under the applicable HSN code for labour charges, the contractor may also claim Input tax credits (ITCs) or input tax deductions on such supplies.
If the Labour Contractor Is Not GST-registered
If a labour contract’s labour contractor or providing agency is not GST registered, the receiver of the services will use the RCM, or reverse charge mechanism, to charge the GST rate on labour supply.
GST on Manpower Supply
Manpower supply services, such as drivers, data entry operators, clerical staff, security services, and housekeeping, attract an 18% GST. This rate applies whether these services are supplied to businesses, individuals, or government departments. It’s crucial to note that even if manpower services are provided to the Central or state governments, GST at 18% is still applicable.
However, there are exceptions. If manpower services are part of activities assigned to a Panchayat or Municipality under Articles 243G and 243W of the Indian Constitution, no GST is charged. For instance, services like drivers and cleaners for the solid waste management system provided to City Corporations, Municipalities, or Zilla Parishads are exempt from GST. Similarly, cleaning staff, cooks, watchmen, teachers, and staff nurses working in anganwadis, hostels, and residential schools operated by the Social Welfare Department do not attract GST.
This distinction is crucial for businesses and service providers to understand to ensure compliance with GST regulations and avoid unnecessary tax liabilities.
GST on Labour Charges: GST on the Provision of Labour
Any labour services, including driving, data entry, and other clerical work, security, and housekeeping, provided to a person (whether or not for commercial purposes) are subject to GST at 18%. It is vital to remember that certain services will be subject to GST at a rate of 18% if given to the federal, state, and local governments, or any government department.
In contrast, no GST is charged if such personnel services are provided as part of an activity for a task delegated to a Panchayat or Municipality under articles 243G and 243W, respectively, of the Indian Constitution. For instance, drivers and cleaners for the City Corporation, Municipalities, or Zilla Parishad’s solid waste management system. Another example would be the cleaning workers, cooks, watchmen, teachers, and staff nurses employed by the Social Welfare Department at Anganwadis, hostels, and residential schools.
Exemption: GST on Labour Charges
According to Notification No. 12/2017 from 28 June 2017, the following services provided under a pure labour contract are free from GST:
- Services for a “single residential unit” that are not tied to a residential complex, such as construction, erection, commissioning, or installation of original works
- Services related to beneficiary-led individual house construction or improvement under the Housing for All (Urban) Mission or Pradhan Mantri Awas Yojana include construction, erection, commissioning, installation, completion, fit out, repair, maintenance, renovation, or alteration of a civil structure
The exemption is not applicable if numerous units are involved or the contractor or services provider has a contract to complete the entire project, including labour.
Comparison of After-Tax Labour Charges
Before GST, labour charges were subject to excise, VAT, and service tax. With the introduction of GST, these three taxes were consolidated into a single tax. Below is a price 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 |
Note: A works contract entails a combined supply of goods and services. Under the previous service tax rules, a 15% tax was levied on 40% of the total contract value.
With the advent of GST, the sale consideration has decreased. Additionally, input tax credit (ITC) is now available on raw materials purchased.
Structure of the HSN Code at the National GST Portal
The HSN code is a 6-digit code that is structured as follows:
- The first two digits represent the chapter of the HSN code.
- The next two digits represent the heading of the HSN code.
- The next two digits represent the subheading of the HSN code.
For example, the HSN code for sugar is 1701. This means that sugar is classified in chapter 17 of the HSN code, which is the chapter for “Sugars and beet sugar and cane sugar.” The heading for sugar is 1701, which is the heading for “Raw cane sugar.” The subheading for sugar is 170190, which is the subheading for “Other.”
Why Is the HSN So Significant in the Context of the GST?
GST on Labour Charge – The HSN is a globally harmonized system of classifying goods and services. This means that the HSN code for a particular good or service is the same in all countries that use the HSN code. This makes it easier for businesses to trade goods and services internationally.
The HSN is also used to determine the GST rate for a particular good or service. The GST rate is applied to the value of the good or service, and the HSN code is used to identify the value of the good or service.
In addition, the HSN is used to track the movement of goods and services through the supply chain. This information can be used to identify potential areas of tax evasion or fraud.
Overall, the HSN is a valuable tool for businesses and tax authorities alike. It is a globally harmonized system that can be used to classify goods and services, determine GST rates, and track the movement of goods and services through the supply chain.
HSN Code and GST on Labour Charge
It includes many industries and services provided under a simple labour contract, not just the construction sector. The service accounting codes for labour costs in India, generally known as the HSN codes, are shown below, along with the services they cover and the applicable GST rates.
| HSN code for Labour charge service | Service provided | GST Rate |
| 998511 | Services for executive or retained personnel searches | 18% |
| 998512 | Permanent placement services | 18% |
| 998513 | Contract Staffing Services | 18% |
| 998515 | Services for long-term payroll and staffing | 18% |
| 998516 | Temporary permanent-from-staffing services for placements | 18% |
| 998517 | Co-employment staffing services | 18% |
| 998518 | Other employment-related services not listed elsewhere that provide labour | 18% |
Services Accounting Code for GST
The SAC is a 6-digit code that is used to classify services for taxation. The SAC is structured in the same way as the HSN code. The first two digits of the SAC represent the chapter of the SAC, the next two digits represent the heading of the SAC, and the last two digits represent the subheading of the SAC.
For example, the SAC for legal services is 9967. This means that legal services are classified in chapter 99 of the SAC, which is the chapter for “Other business services.” The heading for legal services is 9967, which is the heading for “Legal services.” The subheading for legal services is 996710, which is the subheading for “Legal services for individuals.”
How to Find HSN/Services Accounting Code Tax Rates?
The HSN (Harmonized System) code and SAC (Services Accounting Code) are used to classify goods and services for the purpose of taxation. The HSN code is an international code, while the SAC is a code that is specific to India.
To find the HSN/SAC tax rate for a particular good or service, you can use the GST rate finder on the GST website. The GST rate finder is a tool that allows you to search for goods or services by name, HSN/SAC code, or description. Once you have found the good or service that you are looking for, you can see the GST rate that applies to it.
You can also find the HSN/SAC tax rate by looking up the good or service in the GST schedule. The GST schedule is a list of all goods and services that are subject to GST, along with their respective HSN/SAC codes and tax rates.
Conclusion
GST on Labour Charge – This article has shown that even labour charges are subject to GST taxation. Since they may easily load the costs of supplies and increase their profits, contractors want service recipients to operate under a works contract and supply both labour and materials. On the other hand, owners want pure labour agreements since they allow them to supply supplies, raise quality, and maintain material costs. Maintaining finances and complying with GST is laborious for owners and contractors.
FAQs
Is GST applicable on labour charges?
GST is generally applicable to labour charges, except for certain exemptions. The tax implications depend on the nature of the service provided and applicable GST rates.
What is the GST rate for labour composition?
The GST rate for labour composition varies based on the specific service. Different services may attract different GST rates, ranging from 5% to 18%.
Is GST on labour charges 12% or 18 %?
GST on labour charges can be either 12% or 18%, depending on the type of service. The applicable rate is determined by GST regulations and the specific nature of the service provided.
Which services are exempted from GST?
Some services are exempted from GST, including essential services like healthcare and education. However, exemptions can vary, and it's crucial to refer to GST regulations and official updates for accurate and current information.
What is the HSN code for labour charges?
The Harmonized System of Nomenclature (HSN) code for labour charges depends on the specific nature of the service. Each type of service has a distinct HSN code under the GST classification system, facilitating accurate tax calculation and reporting.
