GST on Labour Charges: Applicability, HSN Code and GST Rate

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. This article deep dives into classification of labour charges under GST for various types of labour contracts and GST applicable on the same.

Types of labour contract

There are two types of labour contract:

1. 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.
2. 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.

Tax on labour charges: Before & after GST

Pre-GST, excise, VAT and service tax was charged on labour charges. But, post-GST, all three taxes got subsumed under GST. Price comparison of labour charges pre and post GST is shown below:

Note: A works contract involves a composite supply of goods and services. Under service tax rules, the tax was paid at 15% to the extent of 40% of the total contract value.

Thus, with the introduction of GST, the sale consideration is reduced. Also, ITC will be available on raw materials purchased.

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?

For computing GST on labour charges, the transaction value is considered as the value of supply. The transaction value includes all taxes and duties levied under other statutes except IGST, CGST, and SGST. Practically, there are many expenses, which are borne on behalf of the supplier of the labour contract by the service recipient. All such charges should be included in the value of supply.

Let us take an example of ABC (labour supplier). He is supplying labour to XYZ. He is not deducting EPF and ESI on labour charges, and thus XYZ is deducting the same. So what all charges should be considered for the calculation of GST?

• Basic amount for labour supply- Rs.100
• A service charge at 10% on 100- Rs.10
• EPF- Rs.12
• ESI- Rs.4.75
• Total- Rs.126.75

GST is charged on the total amount- Rs.22.8 (126.75*18%)

GST on manpower supply

Any manpower services such as drivers, data entry operators and other clerical staff, security services, and housekeeping services supplied to a person (whether or not business) attract GST at 18%. It is important to note that if such services are provided to the Central or state governments or any government department will also attract GST at the rate of 18%.

On the other hand, if such manpower services are rendered as a part of any activity for any function entrusted to a Panchayat or Municipality under articles 243G and 243W respectively of the Indian Constitution, no GST is levied. For example, drivers and cleaners for the solid waste management system to City Corporation, Municipalities or Zilla Parishad. Another example can be cleaning staff, cooks, watchmen, teachers, and staff nurses in anganwadis, hostels and residential schools operated by the Social welfare department.

Labour Charges HSN Code with GST Rate

Note about GST on import of labour

1. Labour contractor registered under GST: If the supplier agency is registered under GST, the agency should charge GST for labour supply. It can also claim the input tax credit for the same.
2. The Labour contractor is not registered under GST: If the supplying agency is not registered under GST, the service receiver should charge GST under the reverse charge mechanism.

Exemptions available on labour charges

Below services of the pure labour contract are exempt from GST as per Notification no.12/2017 dated 28th June 2017:

1. Services of construction/erection/commissioning or installation of original works related to a ‘single residential unit otherwise than as a part of a residential complex.
2. Services of construction/erection/commissioning /installation/completion/fitting out/repair/maintenance/renovation or alteration of a civil structure or any other original works related to the beneficiary led individual house construction/ enhancement under the housing for all (urban) mission or Pradhan Mantri Awas Yojana.

Note: The above exemption is not allowed if the supplier does contraction work as a whole, including labour or if such construction involves multiple units.

Read more - GST on Construction Services and Materials: Applicability, GST Rate and HSN Code