The GST scheme defines a service as any activity or transaction involving the use or conversion of money from one form, currency, or denomination to another form, currency, or denomination, for which a separate consideration is charged.
Considering this background, one may wonder if they have to pay GST on labour charges. Continue reading to learn more about this topic.
Types of labour contracts under GST
An understanding of the concept of contracts is essential before diving into the GST on labour charges.
Contract for Labor Only
Pure labour contracts are such contracts. A service provider here does not use any materials when providing the service. GST is typically charged at 18% on pure labour contracts, unless they are exempt.
Labour and Supply Contract
According to Section 2(119) of the CGST Act, work contracts are essentially contracts of service that may involve the supply of goods during execution. In other words, the contract is a composite supply of both goods and services, with the service acting as the governing element. Work contracts of this nature are subject to GST at 12% or 18%, depending on their nature.
GST rates on labour charges vary based on the services to be rendered. Thus, here are the SAC and GST rates:
|Service Accounting Code (SAC)||Nature of Service||GST on Labour Charges|
|998511||Retained or executive personnel search||18%|
|998515||Long-term staffing or payroll||18%|
|998516||Temporary staffing-to-permanent placement||18%|
|998518||Other employment and labour supply||18%|
Labor Charges before and after GST
Before the introduction of GST registration, labour charges were regulated by VAT, excise, and service tax. As a result, all of these were consolidated into one GST tax rate based 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)
|VAT @ 5% of total cost||Rs. 50/-||–|
|GST @ 18% of total cost||–||Rs. 180/-|
|Total Sale Consideration||Rs. 1235/-|
In addition, ITC facilities will be available on raw materials purchased.
GST on Labour Charges: Calculation of Supply Value
The transaction value corresponds to the value of the supply when computing GST on labour charges. This includes all taxes and duties applicable under different statutes, except for CGST, SGST, and IGST. As a result, the expenses borne by the service beneficiary on behalf of the supplier are included in the supply value.
Consider a firm that supplies labour HSN code to a beneficiary to illustrate this effect. ESI and EPF are deducted by the beneficiary since the firm does not deduct them from labour charges. GST is calculated by taking into account the following charges:
- 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/-
GST exemptions for labour charges
One may have noticed that exemptions are available in specific cases under pure labour contracts. The following two conditions were relaxed by Notification No. 12/2017 dated 28th June 2017:
- Contracts for the construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of any civil structure under the Pradhan Mantri Awas Yojana or Housing for All (Urban) Mission or other possible original works related to beneficiary-led individual house construction or applicable enhancement.
- Providing pure labour services relating to construction, erection, commissioning, or installation of original works for individual residential units as opposed to units within a complex.
As a reminder, the above exemption is not allowed if the supplier takes on the entire construction project or if the project involves multiple units.
It is important for service providers to understand the GST on labour charges so that they can categorize their work accordingly. Moreover, compliance will be greatly simplified and enforced. Furthermore, the above information will enable individuals to identify the cases in which GST on labour charges is exempt so that consumers are also able to benefit from this tax structure.