GST on Labour Charges

Under the GST scheme, the definition of “service” encompasses any activity or transaction that relates to the use of money, its conversion by cash or any mode, from one form, currency, or denomination, to another form, currency or denomination for which a separate consideration is charged.

Against this backdrop, one may wonder if they are liable to pay GST on labour charges. Read on to know more about the topic.

Labour Contracts Under GST and its Types

Before diving into the GST on labour charges, one needs to understand the concept of contracts that put this tax into effect.

Labour Contract for Labour Only

Such a labour contract is known as a pure labour contract. Here, the service supplier does not use any material while offering the service. Typically, pure labour contracts attract a GST at 18%, unless exempt.

Labour Contract for Labour and Supply

These contracts are known as work contracts and are defined in Section 2(119) of the CGST Act, which states that a works contract is essentially a contract of service that could potentially involve the supply of goods during the execution of the contract. In other words, it is a composite supply of both goods and services, with the service acting as the governing element of the contract executed between two parties. Such work contracts attract a GST at 12% or 18% depending on the nature of the service.

Service Accounting Code and Rate of GST on Labour Charges

Source

The GST rate on labour charges varies on the basis of the service that is to be rendered. Accordingly, the information about the SAC and GST rate is as below:

Service Accounting Code (SAC)	Nature of Service	GST on Labour Charges
998511	Retained or executive personnel search	18%
998512	Permanent placement	18%
998513	Contract staffing	18%
998515	Long-term staffing or payroll	18%
998516	Temporary staffing-to-permanent placement	18%
998517	Co-employment staffing	18%
998518	Other employment and labour supply	18%

Comparison of Pre-GST Tax and GST on Labour Charges

Prior to the introduction of GST on labour charges, VAT, excise, and service tax was charged. Soon after, these were all subsumed under a consolidated GST tax rate depending on the nature of the work.

The difference in taxation is tabulated below:

Particulars	Pre-GST Tax on Labour Charges	GST on Labour Charges
Total cost, that is, the sum of material and labour cost	Rs. 1000/-	Rs. 1000/-
Excise @ 12.5%	Rs. 125/-	-
Service tax at 15% (applicable on 40% of 100)	Rs. 60/-	-
VAT @ 5% of total cost	Rs. 50/-	-
GST @ 18% of total cost	-	Rs. 180/-
Total Sale Consideration	Rs. 1235/-	Rs. 1180/-

It is also worth mentioning here that the ITC facility will be available on the raw materials purchased.

Calculation of Supply Value for Computing GST on Labour Charges

While computing GST on labour charges, the transaction value corresponds to the value of supply. It includes all taxes and duties that are applicable under different statutes, except CGST, SGST, and IGST. As a result, the expenses borne by the service beneficiary on behalf of the supplier is included in the supply value.

To illustrate this effect, consider a firm that is supplying labour to a beneficiary. Since the firm is not deducting ESI and EPF on the labour charges, the beneficiary is deducting the same. As such, the charges for consideration during the calculation of GST include:

Base amount for supplying labour = Rs. 1,000/-
Service charge at 10% on Rs. 1,000 = Rs. 100/-
EPF = Rs. 120/-
ESI = Rs. 47.50/-
Total = Rs. 1267.50/-
GST chargeable @ 18% of Rs. 1267.50/- = Rs. 228/-

Exemption Cases of GST on Labour Charges

Under pure labour contracts, one may have seen that exemptions are available in specific cases. In this regard, reference is drawn to Notification No. 12/2017 dated 28th June 2017 that relaxes GST for the following two conditions:

Services provided by way of pure labour contracts in regards to construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or 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.
Services by way of pure labour contracts in regards to construction, erection, commissioning, or installation of original works for a single residential unit other than what is a part of a residential complex.

However, it is worth noting that the above exemption is not allowed if the supplier takes on the construction job as a whole or if the construction involves multiple units.

Conclusion

Knowing the GST on labour charges allows service providers to categorise their work as per the law. Plus, it will greatly simplify the journey to compliance and will enforce it. The above information will also empower individuals on the cases where GST on labour charges is exempt so that consumers also gain from this tax structure.