written by Khatabook | September 23, 2021

Know About GST On Labour Charges In India

Is GST applicable on labour charges? GST or the Goods and Services Tax applies to all services and goods, including services rendered under a labour contract. A labour contract in construction parlance is a specific agreement between two parties contracting wherein the contractor agrees to do some work with detailed conditions and terms and the owner supplies the materials required to execute the contract. This GST on labour charges contract type is called a pure labour contract and works contract in GST language.

Types Of Labour Contracts:

The 2 kinds of labour contracts are detailed below.

1. A labour contract containing only labour service: In GST terms, a labour contract containing only labour service is known as the pure labour contract. Under the terms of such a contract, the service supplier is not to use any materials procured by them in providing the labour service as laid out in the HSN code for labour charges details.

For example, Mr Raj contracts with Mr Shyam to build his house in a pure labour contract. This contract implies that Mr Shyam will provide the workers and use only his tools, machinery etc., while Mr Raj will supply the materials like cement, sand, bricks etc. GST on manpower supply is chargeable.

2. A labour contract containing material supply and labour: This kind of a labour contract where both material supply and labour is also called in GST terms a works contract. The works contract stands defined U/S 2(119) of the 2017 CGST Act. It also specifies that such a composite supply of materials and labour should have a governing contractual element wherein labour services are the main part of the contract. Here also GST rate on manpower supply services is applicable.

For example, Mr Raj contracts with Mr Shyam to build his house in a works contract. This contract implies that Mr Shyam will now provide all the materials like cement, sand bricks, etc., along with his workers, tools, machinery, etc., and complete the job as laid out in the terms and conditions of the contract. Again an example of such a condition would be to complete the house within a period of 9 months, or Mr Raj will provide sand and bricks while Mr Shyam has to provide labour plus cement only.

Comparison of Labour Charges After-tax:

In the previous regime, VAT, excise and service taxes would be charged on a labour contract. After introducing GST, the government subsumed these 3 taxes into a single GST tax under appropriate labour HSN codes. 

Take a look at the table below to compare the taxes pre GST and post GST for a labour contract.

Particulars

Pre-GST

Rs

Post-GST Rs

Total works contract cost including labour and material- (A)

10000

10000

Excise duty @ 12.5%- (B)

1250

Service tax @ 15% on (approximately 40% of 10000)- (C)

600

VAT at 5% of the total at A- (D)

500

GST at 18% of A (E)

1800

Total sale consideration A - (B+C+D +E)

12350

11800

Note: In a works contract, there is a composite supply of services and goods. It was the norm that an approximate 40% of the total contract value is taken as the labour component for service tax purposes.

From the example worked out above, post-GST, the taxes were reduced from Rs 2350 for the total value of Rs 10,000 to 1800 for the same value. The final sale consideration amount also has been reduced from Rs 12350 to Rs 11800. Another distinct advantage of the introduction of GST is that ITC or Input tax credit is now available on all the raw materials purchased in the works contract.

Also Read: Quarterly Return Filing and Monthly Payment of Taxes (QRMP) Scheme under GST

Applicability of GST to Labour Charges

GST applies to all services and labour contracts unless exempted specifically by a notification passed by the Government and recommended by the GST Council. For services under GST on labour contractor or under the GST laws, all monetary transactions are included except for securities or money changed in any mode for conversion of securities etc.

In a pure labour contract, GST on labour supply applies to the supply of labour services through providing workers to do the job contracted or supply of labour force. The pure labour contract and pure works contract also have certain exemptions and considerations discussed below.

Supply Value In Computing GST on Labour Charges:

Under the GST Act, the GST on labour charges is computed using the transactional value as the supply value. Typically the transaction value implies the value of the transaction, including all expenses, duties and taxes levied under various statutory laws except for CGST, IGST, and SGST. In practice, the person contracting under a labour contract has to bear several expenses on behalf of the labour contractor and his supplies under a labour contract. Hence, it is only right to include all these charges to arrive at the actual supply value or the transactional value.

Consider an example to understand this. Suppose Mr Shyam, the labour supplier contracts with Mr Raj for a pure labour contract. Mr Shyam has to supply workers or labour to execute the work detailed in the contract while Mr Shyam provides all the materials. However, Mr Shyam does not deduct ESI or EPF when supplying labour to Mr Raj, who has to deduct the same. Now what should be the transactional value to calculate GST on, and what charges are included?

  • Suppose the basic labour supply amount is = Rs.10000
  • The service charges @ 10% are = Rs.1000
  • The EPF deductible @12% is = Rs.1200
  • The ESI deductible is = Rs. 475
  • Now the total amount spent is = Rs.12675

GST is then charged on the total amount as = Rs.2281.50 or (12675*18%).

HSN Codes and GST Rates For Labour Charges:

It is not just the construction industry but various industries and services rendered under a pure labour contract. The HSN code for labour charges in India, also called the service accounting codes with their services rendered and GST rates for the more popular labour contracts, is given below:

Labour charges HSN code

Service rendered

Labour charges GST rate 

998511

Retained or Executive personnel search services.

18%

998512

Permanent services for placements.

18%

998513

Contract Services for Staffing

18%

998515

Long- Term payroll/staffing services

18%

998516

Temporary permanent-from-staffing services for placements.

18%

998517

Co-employment services of staffing.

18%

998518

Other labour and employment supply services that are not classified elsewhere.

18%

Note: Implications of GST on Labour Contractors:

Two scenarios can arise in the case of labour contractors, which we shall discuss below.

1. If the labour contractor is GST registered: When the labour contractor/ supplier agency is registered under GST, the contractor/ agency will charge GST on labour contract services supplied. The contractor can also claim the ITCs or input tax credit on such supplies under the appropriate labour charge HSN code. 

For example, take Mr Raj contracting with the labour contractor - Mr Shyam, to build his house. If Mr Shyam is GST registered, he can collect GST and also avail the ITC facility.

2. If the labour contractor is not GST registered: When the labour contractor or supplying agency under a labour contract is not GST registered, the recipient of the services will charge GST rate on manpower supply under the RCM or reverse charge mechanism. 

For example, if Mr Raj contracts with the labour contractor Mr Shyam to build his house, and Mr Shyam is not GST registered, Mr Raj must collect the GST under the RCM facility.

Labour Charges Exemptions Available:

As already pointed, there are some exceptions in the manpower supply under GST services of the pure labour contract. The GST exemptions are notified in the 28th June 2017 Notification no.12/2017 and are given below:

  1. Services of installation/ erection/ construction/commissioning of original works of an independent or ‘single residential unit’ not a part of a residential complex under the appropriate HSN code of labour charges.
  2. Services of installation/ erection/ construction/commissioning/ completion/ repair/ fitting out/ maintenance/alteration or renovation of a civil structure or original works/ independent unit of the beneficiary under the Pradhan Mantri Awas Yojana scheme or enhancements and construction under the Urban Housing for All Schemes as defined under the labour supply HSN code.

Note: The exemption is not applicable if multiple units are involved or the services supplier or the contractor is under a contract to execute the whole work, including labour.

Also Read: A Step-by-Step Guide to GST Registration Procedure in India

Parting Words:

As seen in this article, even labour charges are under the purview of GST taxation. Contractors prefer the service beneficiaries to work under a works contract and supply both labour and materials, as they can easily load the costs of materials and earn higher profits. On the other hand, owners prefer pure labour contracts where they can supply materials and improve the quality while maintaining the true prices of materials. It is an arduous task for both the owners and contractors to maintain accounts and be GST compliant. That’s where the Khatabook app can be a game-changer doing everything from maintaining all your accounts, helping with GST compliance and more. All from a few clicks on your mobile phone. It is specially designed for small contractors and people who may need to be GST compliant. Try it today!

FAQs

1. Is GST registration and compliance required for labour contractors?

Yes, all services and goods are taxable under GST unless specifically notified as GST exempt under a government notification and recommended by the GST Council. Contractors with GST registration can collect GST and avail the ITC facility for input tax credits. 

2. What is the GST applicable for works contracts?

Here’s a table for the GST applicable under a works contract, the HSN codes and the type of services.

Service Details

HSN Code

GST rate

Composite works contracts for the government involve repairing or constructing dams, monuments, pipelines, canals, disposal/ sewage treatment, and water supply governmental schemes.

9954

12%

Construction under a works contract for affordable housing building projects.

9954

12%

Works contract for the government involving earthwork.

9954

5%

Construction works contracts for oil exploration.

9954

12%

Subcontractor under a works contract to the main contractor  for construction services provided to the government

9954

12%

3. What is the implication of a labour contractor’s GST taxation if not GST registered?

When the labour contractor or supplying agency is not GST registered, the recipient of the services must charge GST under the RCM or reverse charge mechanism. For example, if Mr Raj contracts with the labour contractor Mr Shyam to build his house. If Mr Shyam is not GST registered, Mr Raj must collect the GST under the RCM facility.

4. What is the implication of a labour contractor’s GST taxation if he is GST registered?

When the labour contractor/ supplier agency is GST registered, the contractor/ agency will charge GST for the labour services supplied. The contractor can also claim the ITCs or input tax credit on such supplies. For example, take Mr Raj contracting with the labour contractor - Mr Shyam, to build his house. If Mr Shyam is GST registered, he can collect GST and also the ITC facility.

5. How is GST on labour charges computed?

Under the GST Act, the GST on labour charges is computed using the transactional value as the supply value. Typically the transaction value implies the value of the transaction, including all expenses, duties and taxes levied under various statutory laws except for CGST, IGST, and SGST. In practice, the person contracting under a labour contract has to bear several expenses like ESI, EPF etc., on behalf of the labour contractor and his supplies under a labour contract. Hence, it is only right to include all these charges to arrive at the actual supply value or the transactional value.

6. At what rate does the pure labour contract get taxed under GST?

Pure labour contracts under the HSN code labour charges described from 998511 to 998518 for pure labour contracts are charged GST tax at the rate of 18% of the value of supply and is inclusive of all other taxes like EPF, ESI etc.

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