Understanding GST Implications on Labour Services: Applicability, HSN Codes, and Rates

Labour agreements, encompassing both pure service arrangements and comprehensive works contracts, are fundamental across diverse sectors like construction and personnel provision. As the Goods and Services Tax (GST) generally applies to labour services at an 18% rate, comprehending applicable exemptions, Harmonised System of Nomenclature (HSN) codes, and computation methodologies is essential for optimizing costs and maintaining tax compliance. This article explores the categorisation of labour charges under GST for different contract types and the corresponding GST implications.

Types of Labour Contract

Labour agreements can be categorised into two main forms:

• Pure Labour Service Contracts: Within the GST framework, these are referred to as pure labour contracts. In such arrangements, the service provider offers labour without incorporating any materials.
• Combined Labour and Material Contracts: These are identified as works contracts, as specified in section 2(119) of the CGST Act, 2017. A works contract represents a composite supply of both services and goods, where the service component is the predominant aspect of the agreement between the involved parties.

Tax on Labour Charges: Before & After GST

Before the implementation of GST, labour charges were subject to excise duty, Value Added Tax (VAT), and service tax. However, with the advent of GST, these three taxes were consolidated under a single tax regime. A comparison of labour charge pricing before and after GST is presented below:

It is important to note that a works contract encompasses a combined provision of goods and services. Previously, under service tax regulations, tax was applied at 15% on 40% of the total contract value. The transition to GST has resulted in a lower overall sale consideration. Furthermore, businesses can now claim Input Tax Credit (ITC) on raw materials procured.

Applicability of GST on Labour Charges

GST applies to all services unless explicitly exempted through a specific notification or legal provision. Services include monetary transactions but exclude actual money, securities, or conversions by cash or other means. Therefore, GST is applicable to the supply of labour services. Different types of labour contracts and exemptions available for pure works contracts are detailed in subsequent sections.

Value of Supply for GST Calculation on Labour Charges

When determining GST on labour charges, the transaction value is considered the value of supply. This transaction value includes all taxes and duties imposed under other statutes, excluding IGST, CGST, and SGST. In practice, service recipients often bear various expenses on behalf of the labour contract supplier. All such charges must be incorporated into the value of supply.

Consider ABC (a labour supplier) providing labour to XYZ. If ABC does not deduct EPF and ESI on labour charges, and XYZ undertakes these deductions, the following charges are considered for GST calculation:

• Basic amount for labour supply: Rs.100
• A service charge at 10% on 100: Rs.10
• EPF: Rs.12
• ESI: Rs.4.75
• Total: Rs.126.75

GST is then charged on this total amount, resulting in Rs.22.8 (126.75 * 18%).

GST on Manpower Supply

Manpower services, such as the provision of drivers, data entry operators, clerical staff, security services, and housekeeping services, are subject to an 18% GST rate when supplied to any person, whether or not they are a business entity. This 18% GST rate also applies if such services are provided to Central or State Governments or any government department.

Conversely, if these manpower services are rendered as part of an activity or function assigned to a Panchayat or Municipality under Articles 243G and 243W of the Indian Constitution, respectively, no GST is levied. Examples include drivers and cleaners for urban solid waste management systems serving City Corporations, Municipalities, or Zilla Parishads. Another instance involves cleaning staff, cooks, watchmen, teachers, and staff nurses in anganwadis, hostels, and residential schools managed by the Social Welfare Department.

Labour Charges HSN Code with GST Rate

The Harmonised System of Nomenclature (HSN) codes and corresponding GST rates for various labour services are outlined below:

GST on Import of Labour

Concerning the import of labour, two scenarios apply:

• GST-Registered Labour Contractor: If the supplying agency is registered under GST, it must levy GST for the labour supply and can subsequently claim the input tax credit.
• Non-GST-Registered Labour Contractor: If the supplying agency is not registered under GST, the service recipient is responsible for charging and remitting GST under the reverse charge mechanism.

Exemptions Available on Labour Charges

Specific pure labour contract services are exempt from GST, as per Notification no.12/2017 dated June 28, 2017:

• Construction, erection, commissioning, or installation services for original works pertaining to a single residential unit, provided it is not part of a larger residential complex.
• Services of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of a civil structure or any other original works related to individual house construction or enhancement under the Housing for All (Urban) Mission or Pradhan Mantri Awas Yojana.

It is important to note that this exemption does not apply if the supplier undertakes the entire construction work, including labour and materials, or if the construction involves multiple units.

Read more - GST on Construction Services and Materials: Applicability, GST Rate and HSN Code