GST Rate on Labour Charges: Find HSN Code & GST Rate

The Goods and Services Tax (GST) has streamlined India’s indirect tax regime by creating a unified structure for various goods and services. Labour charges, a significant component in many industries, are subject to GST based on the nature of the service provided. This article provides a detailed overview of the GST rates applicable to labour charges, labour charges hsn code, and compliance requirements.

What is a Labour Contract?

A labour contract is a legal agreement between an employer and a worker or group of workers that specifies the terms and conditions under which the labour will be provided. This contract governs the relationship between the employer and the employee(s) and defines the scope of work, rights, and responsibilities of both parties.

Labour contracts may attract GST depending on the nature of the work and the services provided.

Various Kinds of Labour Contracts

Labour contracts can be categorised into two main types based on the inclusion of materials along with the labour service:

Pure Labour Contract

A pure labour contract involves only the provision of labour services without the use of any materials. These contracts are treated as pure labour services under GST. Such contracts may qualify for exemptions if provided for specific purposes, such as government-approved housing projects, agricultural work, or public welfare schemes.

Examples:

• Painting services where the client supplies the paint.
• Masonry work where the builder provides all materials.

Labour Contract Constituting Labour and Material (Works Contract)

A labour contract that includes both labour services and materials is termed a works contract under Section 2(119) of the CGST Act, 2017.

• It is a composite supply involving both goods and services.
• The service component (labour) is the principal element governing the contract.

GST Implications

Works contracts are subject to GST, generally at 18%, unless exempt for specific activities (e.g., affordable housing construction).

Examples:

• Construction of a building where the contractor provides cement, bricks, and labour.
• Interior design services, including furniture supply and installation.

Understanding the distinction between these two types of labour contracts is essential for determining the applicable GST rates, compliance requirements, and tax liabilities.

Comparison of After-Tax Labour Charges: Pre-GST vs. Post-GST

Before the implementation of GST, labour charges were subject to multiple taxes, including excise duty, VAT, and service tax. However, with the introduction of GST, these taxes were unified under a single tax regime, simplifying the tax structure and reducing the overall tax burden. Below is a price comparison of labour charges pre-GST and post-GST:

Key Notes:

• Reduction in Sale Consideration: Under GST, the total sale consideration has decreased from ₹123.5 (Pre-GST) to ₹118 (Post-GST), showing a lower effective tax burden.
• Unified Tax Structure: The previous system of multiple taxes (excise, VAT, and service tax) has been replaced with a single GST at 18%, applicable to the entire contract value.
• Input Tax Credit (ITC): Post-GST, businesses can avail of ITC on raw materials and other inputs, further reducing the effective tax liability.

Applicability of GST on Labour Charges

GST is applicable to labour contracts provided the service provider is registered under the prevailing GST regime. Below are the key points of applicability:

• GST Registration Requirement: Businesses or contractors with an annual turnover exceeding ₹20 lakh (or ₹10 lakh in special category states) must register for GST. Once registered, they are authorised to charge GST on their services and claim Input Tax Credit (ITC) on eligible purchases.
• Registered Service Provider: If the contractor is registered under GST, they are responsible for charging GST on labour contracts and issuing GST-compliant invoices.
• Unregistered Service Provider: If the contractor is not registered under GST, the service recipient must pay GST under the Reverse Charge Mechanism (RCM). In such cases, the recipient can claim ITC on the GST paid, provided all conditions under GST law are met.

What is the Value of Supply to Compute GST on Labour Charges?

The taxable value of supply for computing GST on labour charges includes all direct and indirect expenses associated with the labour contract. This ensures comprehensive taxation and compliance with GST regulations. The following are included in the value of supply:

• Labour Costs: The basic cost of labour provided under the contract.
• Service Charges: Any additional charges or fees levied by the service provider, such as administrative or overhead costs.
• Other Contributions: Expenses are borne on behalf of the service provider, such as EPF (Employee Provident Fund) and ESI (Employee State Insurance) contributions, if applicable.

 How is the Labour Charges GST rate Calculated?

For computing GST on labour charges, the transaction value is taken as the value of supply. This transaction value includes all taxes, duties, and charges levied under other statutes, except IGST, CGST, and SGST. Additionally, any expenses borne by the service recipient on behalf of the labour supplier must also be included in the value of supply for GST calculation.

Example Calculation

Let us consider an example where X (labour supplier) provides labour services to Y. In this case, DEF does not deduct Employee Provident Fund (EPF) and Employee State Insurance (ESI) contributions, which are instead paid by X. Here\u2019s how the GST calculation would work:

The basic amount for labour supply: ₹200

• Service charge at 10% on ₹200: ₹20
• EPF deducted by X: ₹24
• ESI deducted by X: ₹9.5
• Total value of supply: ₹253.5

GST is calculated on the total value of supply:

• GST at 18% on ₹253.5 = ₹45.63

The value of supply for GST includes the basic labour charges, service charges, and any additional amounts borne by the service recipient on behalf of the supplier, such as EPF and ESI.  

GST on Manpower Supply Services

Manpower supply services, including drivers, data entry operators, clerical staff, security services, and housekeeping personnel, are subject to GST at 18%. This applies whether the services are provided to businesses or individuals.

GST on Manpower Services to Government

Manpower services provided to the Central Government, State Governments, or any government department are also subject to 18% GST. These services are treated the same as those provided to private entities, and no exemptions apply under normal circumstances.

Exemptions Under Articles 243G and 243W

However, there are exemptions for manpower services provided for activities related to functions entrusted to a Panchayat or Municipality under Articles 243G and 243W of the Indian Constitution. In such cases, no GST is levied.

Examples of Exempted Services

• Solid Waste Management: Drivers and cleaners engaged in the solid waste management system for City Corporations, Municipalities, or Zilla Parishads.
• Social Welfare Services: Cleaning staff, cooks, watchmen, teachers, and staff nurses employed in anganwadis, hostels, and residential schools operated by the Social Welfare Department.

Key Takeaways

• Standard GST Rate: 18% for manpower services, regardless of the recipient being a business or government entity.
• Exemptions: Applicable only if the manpower services support activities entrusted to Panchayats or Municipalities as per the Constitution.
• Examples of Exemptions: Services in waste management or social welfare institutions

Labour Charges HSN Code with GST Rate

Labour charges are categorised under different HSN codes depending on the type of service provided. Here are the commonly applicable HSN codes and their respective GST rates:

Key Notes:

• Pure Labour Contracts: If the labour charges involve only services without materials, it is termed a pure labour contract. GST is applicable as per the specific labour charges hsn code, and service type.
• Works Contracts: If labour and materials are supplied together, the service falls under the works contract, classified as a composite supply, with GST at 18%.
• Exemptions: Labour charges for activities related to Panchayat or Municipal functions under Articles 243G and 243W are exempt from GST.

Note on GST for Import of Labour

• Labour Contractor Registered Under GST: If the supplier agency providing the labour is registered under GST, it is required to charge GST for the labour supply service. The recipient can claim Input Tax Credit (ITC) on the GST paid, subject to compliance with GST rules.
• Labour Contractor Not Registered Under GST: If the labour contractor or supplying agency is not registered under GST, the recipient of the service must pay GST under the Reverse Charge Mechanism (RCM). In this case, the recipient is also eligible to claim ITC on the GST paid, provided all other conditions are met.

Exemptions on Labour Charges

Certain pure labour contract services are exempt from GST under Notification No. 12/2017, dated 28th June 2017. The exemptions include:

• Construction or Installation of Original Works for Single Residential Units: Services related to the construction, erection, commissioning, or installation of original works for a single residential unit (not part of a residential complex) are exempt from GST.
• Housing Projects Under Government Schemes: Labour services for construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of civil structures or original works under the following government schemes are exempt:
• Beneficiary-led individual house construction or enhancement under the Housing for All (Urban) Mission.
• Projects under the Pradhan Mantri Awas Yojana (PMAY).

Note: These exemptions do not apply if:

• The supplier provides construction work as a whole, including materials and labour.
• The construction involves multiple residential units as part of a larger project.

Conclusion

Understanding the labour charges HSN code is crucial for determining the applicable GST on labour charges and ensuring compliance. The labour charges GST rate primarily depends on the nature of the service, with the standard GST rate on labour charges being 18% for most services, as classified under the appropriate HSN code for labour charges.

FAQs on GST Rate on Labour Charges

1. What is the HSN code for labour charges?

The HSN code for labour charges depends on the specific type of service provided. Common examples include:

• 998511: Executive/retained personnel search services
• 998512: Permanent placement services
• 998513: Contract staffing services
• 998515: Long-term staffing or payroll services

2. What is the GST on labour charges?

The GST on labour charges is typically 18%, applicable to most services, including staffing, repair, and maintenance. However, exemptions may apply for specific government-related projects.

3. What is the labour charges GST rate?

The labour charges GST rate is generally 18% unless the service qualifies for exemptions, such as services related to Panchayats or government housing schemes.

4. Are there exemptions for GST on labour charges?

Yes, GST for labour charges is exempt in cases like:

• Services for construction under Pradhan Mantri Awas Yojana (PMAY).
• Services related to functions entrusted to Panchayats or Municipalities under Articles 243G and 243W.

5. How is the GST rate on labour charges calculated?

The GST rate on labour charges is calculated on the total value of supply, which includes:

• Basic labour costs
• Service charges
• Other contributions such as EPF and ESI (if applicable).

6. What is the labour GST rate for work contracts?

For works contracts involving both labour and materials, the labour GST rate is 18%, treated as a composite supply under GST regulations.

7. Can ITC be claimed for GST on labour charges?

Yes, businesses can claim Input Tax Credit (ITC) on GST for labour charges if the service is used for business purposes and complies with GST regulations.

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