Labour contracts, whether pure services or composite works contracts, play a pivotal role in various industries such as construction and staffing. With GST on labour charges typically at 18%, understanding exemptions, HSN codes, and calculation methods can unlock opportunities for cost optimisation and ensure compliance with tax regulations.
What is a Labour Contract?
A labour contract is a legal agreement between an employer and a worker or group of workers that specifies the terms and conditions under which the labour will be provided. This contract governs the relationship between the employer and the employee(s) and defines the scope of work, rights, and responsibilities of both parties.
Labour contracts may attract GST depending on the nature of the work and the services provided.
Types of labour contract
- A contract constituting only labour service: Under GST, such a contract is termed as a pure labour contract. The supplier of service should not use any material in providing the service.
- A labour contract constituting labour and material: Such a contract is termed a works contract as defined under section 2(119) of the CGST Act, 2017. It is a composite supply of both services and goods wherein the service part is the governing element in the contract between two parties.
Comparison of After-Tax Labour Charges: Pre-GST vs. Post-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 (A) (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 |
Applicability of GST on labour charges
GST is applicable on all services unless they are specifically exempted by way of any notification or law. Services include transactions involving money but do not include money and securities or conversion by cash or any other mode. GST applies to the supply of service by way of providing labour. The different types of labour contract and exemptions available under pure works contract are discussed in detail in other sections.
What is the Value of Supply to Compute GST on Labour Charges?
The taxable value of supply for computing GST on labour charges includes all direct and indirect expenses associated with the labour contract. This ensures comprehensive taxation and compliance with GST regulations. The following are included in the value of supply:
- Labour Costs: The basic cost of labour provided under the contract.
- Service Charges: Any additional charges or fees levied by the service provider, such as administrative or overhead costs.
- Other Contributions: Expenses are borne on behalf of the service provider, such as EPF (Employee Provident Fund) and ESI (Employee State Insurance) contributions, if applicable.
Labour Charges HSN Code with 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% |
FAQs
Q1. When is RCM applicable for labour charges?
RCM is applicable when labour services are provided by unregistered contractors or involve specific services like security or manpower supply under government contracts.
Q2. Is GST applicable on all types of labor services?
No, certain labour services such as agriculture-related activities and construction under government schemes are exempt from GST.
Q3. What is the GST applicable to work contracts?
Work contracts that combine labour and materials generally attract an 18% GST rate.
Q4. What is the HSN code for labour charges?
The HSN code for labour charges depends on the specific type of service provided. Common examples include:
- 998511: Executive/retained personnel search services
- 998512: Permanent placement services
- 998513: Contract staffing services
- 998515: Long-term staffing or payroll services
Q5. Are there exemptions for GST on labour charges?
Yes, GST for labour charges is exempt in cases like:
- Services for construction under Pradhan Mantri Awas Yojana (PMAY).
- Services related to functions entrusted to Panchayats or Municipalities under Articles 243G and 243W.
Q6. Can ITC be claimed for GST on labour charges?
Yes, businesses can claim Input Tax Credit (ITC) on GST for labour charges if the service is used for business purposes and complies with GST regulations.
Q7. What is the GST rate for labor charges in the construction industry?
Labour charges for construction under government schemes or affordable housing projects are exempt (0%), while other construction-related services attract 18% GST.
