GST on Contract Employee Remuneration: Applicability, Rates, ITC & Compliance

Contract employees and staffing services play a vital role in modern business operations. Under the GST regime, the tax treatment of remuneration paid to contract employees, workforce supply, and staffing agencies is distinct from that of regular salaried employees. While the salary paid for a regular salaried employee is exempt from GST, the remuneration paid to a contract employee will attract GST.

This article provides information about GST on contract employee remuneration, including applicable rates, Input Tax Credit (ITC) eligibility, exemptions, documentation, and recent case laws.

GST applicability on contract employees

• Regular employees: Services provided by an employee to the employer during employment are not treated as supply under Schedule III of the CGST Act.
• Contract employees & manpower supply: If an individual or agency supplies manpower or contract employees on a principal-to-principal basis (not as regular employees), such services are taxable under GST.

Here are some important clarifications regarding GST applicability across various scenarios:

GST rate on contract employee services

• Most contract employees and manpower supply services attract 18% GST for contract staffing services (SAC 998513), long-term staffing (SAC 998515), and temporary staffing-to-permanent placement (SAC 998516).
• If the contract involves the supply of goods and services (e.g., construction), it is treated as a works contract and attracts 18% GST under SAC 9954.
• Pure labour contracts are generally taxed at 18%, unless specifically exempted, such as certain government projects or welfare schemes.

Input Tax Credit (ITC) on GST paid for a contract employee

Businesses can claim ITC on GST paid for contract employee services if these services are used in the course or furtherance of business.

Restrictions:

• Reverse Charge Mechanism (RCM): If a manpower supply is received from an unregistered supplier, GST may be payable under RCM, and the recipient can claim ITC.
• ITC is not available if the contract employee is used for personal purposes or for making exempt supplies.

Documentation for GST compliance in contract staffing

• A GST-compliant tax invoice from the agency/manpower supplier.
• Manpower supply agreement specifying scope and terms.
• Attendance and wage records to substantiate the service.
• Proof of GST payment (if under RCM).
• Vendor’s GST registration certificate (if applicable).
• Payment vouchers and accounting entries for audit trail.

GST exemptions for contract employee services

• Services by an employee to an employer during employment are not taxable under the Schedule III, CGST Act.
• Pure labour contracts for certain government projects, such as Pradhan Mantri Awas Yojana (PMAY), public welfare schemes, and panchayat/municipality functions, are exempt from GST.

Case laws & AAR rulings

• AAR, Karnataka (2018): Labour supply for government housing projects under PMAY is exempt if it is a pure labour contract.
• AAR, Maharashtra (2019): Manpower supply to companies (not on an employer-employee basis) is subject to 18% GST (SAC 998513).
• AAR, Uttar Pradesh (2020): GST applies to the reimbursement of wages and service charges by the recipient to the manpower agency.