According to the GST framework, a “service” encompasses any activity or transaction that involves using money or converting it from one form, currency, or denomination to another. This definition applies irrespective of whether a fee is charged for the service. Consequently, you might be contemplating whether GST should be applied to the costs associated with human labour charges. In this blog, we shall see the applicability of GST rates on labour charges in India.
Understanding Agreement Variations with Respect to GST
Before going into GST rates on labour charges, let us first understand the types of agreements under GST law. The different types of agreements and how Goods and Services Tax impacts them are:
Purpose-Only Employment Contracts and GST
A “pure employee contract” primarily focuses on the provision of labour without the involvement of physical assets for service delivery. However, it’s important to note that services agreements exclusively involving labour may be subject to an 18% Goods and Services Tax, unless they qualify for exemption.
Contraction of Labour and Materials Agreements under CGST Act
Under the CGST Act, works contracts are defined as agreements involving both services and the provision of commodities during contract execution. This implies that such contracts combine elements of goods and services, with the service component being the decisive factor. These contracts are subject to a GST rate of either 12% or 18%, depending on the nature of the services provided.
Accounting for GST in Labour Cost Estimations using Supply Value
When calculating GST on labour costs, the transaction value is determined based on the supply value. This value includes all applicable taxes and fees except for the Central Goods and Services Tax, State Goods and Services Tax, and Individual Goods and Services Tax or GST.
Incorporating ESI and EPF in GST Calculation
Consider the scenario of a service provider, which represents a corporation whose actions can impact a customer. In such cases, when the beneficiary handles the withholding of Employee State Insurance (and Employees’ Provident Fund contributions instead of the employer, it is crucial to include these expenses in the calculation of GST.
GST Exemptions for Labour Expenses
In certain circumstances, exceptions to the application of GST are made for pure labour contracts. These exemptions, as per Notification No. 12/2017 of dated June 28, 2017, are particularly relevant in specific construction-related scenarios:
1. Exemption for Beneficiary-Led Individual House Construction and Pradhan Mantri Awas Yojana
Services provided through pure labour contracts for the construction, erection, commissioning, installation, fitting out, repair, maintenance, renovation, and alteration of any civil structure or other original works related to the construction of individual houses under the Pradhan Mantri Awas Yojana or Housing for All (Urban) Mission are exempt from GST.
2. Exemption for Single-Family Residence Construction
Construction services for single-family residences, in contrast to multi-family complexes, are often provided through pure labour contracts. Such contracts are exempt from GST.
It’s essential to emphasise that these exceptions do not come into play when the supplier is overseeing the entire construction project or when the project encompasses the construction of multiple units. In such scenarios, GST applies as per the standard regulations.
Understanding India’s GST Rates on Labour Charges
The GST registration in India has specific provisions concerning labour costs, especially in the context of construction and works contracts. Mentioned below are the key facts regarding GST rates on labour charges:
1. GST on Contracted Labour Services
GST rates on labour charges do apply in India. When individuals or businesses engage in contractual agreements that involve labour services, they are liable to pay GST on the service component of the contract. This means that GST rates on labour charges apply based on service.
2. Construction Labour Agreements
Within the construction industry, when an owner or beneficiary and a contractor engage in a labour contract, it commonly entails the contractor undertaking the construction work while the owner supplies the necessary materials. This arrangement is termed a “construction labour contract” in GST terminology.
3. Exclusive Labour Agreements or Works Contracts
A contract where the primary focus is on labour costs, and no physical assets are involved in the service provision, is denoted as a “pure labour contract” or “works contract” concerning GST. In such agreements, the emphasis lies solely on the labour component of the service.
It’s essential to highlight that in the discussion of GST rates on labour charges, exclusive labour contracts or works contracts fall under GST regulations i.e., GST rates on labour charges apply, and the applicable GST rates vary based on the precise nature of the services rendered. Typically, these rates range from 12% to 18%, depending on the specific characteristics of the contract.
Diverse Forms of Employment Agreements under GST
Employment agreements can take various forms, and their treatment under GST depends on the nature of the agreement. The different types of employment contracts with respect to GST are:
1. Pure Labour Contracts
A pure labour contract, as per GST regulations, exclusively involves labour services. In such contracts, the service provider is not allowed to utilise resources provided by the client. An example of a pure labour contract is illustrated when Mr. Raj hires Mr. Shyam to construct his house. In this scenario, Mr. Raj supplies the materials, while Mr. Shyam provides the labour and insists on using only his equipment. GST rates on labour charges or services apply in such agreements.
2. Works Contracts
A works contract, as defined in GST context, pertains to a contract that involves both the supply of materials and the provision of labour. This definition aligns with Section 2(119) of the 2017 Central Goods and Services Tax Act.
Comparing Income Tax and Labour Costs under GST
Mentioned below is a comparison between the two tax systems and the impact of GST on labour costs:
1. Transition from Multiple Taxes to Single GST
Under the previous tax system, a worker’s wage or salary could have been subject to multiple taxes but with the implementation of GST, these three taxes were consolidated into a single GST tax. This simplified the taxation process, making it more efficient and straightforward, especially for labour-related services.
2. Inclusion of Labour Costs in Works Contracts
In the context of works contracts, which may involve both the supply of goods and services, service tax regulations traditionally considered labour as approximately 40% of the total contract value. This determination played a significant role in calculating the applicable tax.
3. Impact of GST on Labour Costs
After the implementation of GST, there was reduction in the overall tax burden on labour costs. For instance, suppose the total tax due on a sum of Rs 10,000 was previously Rs 23,500. After the introduction of GST, this tax liability dropped significantly to Rs 1,800. Additionally, the final sales price for the customer also decreased.
4. Input Tax Credit Benefit
One of the notable advantages of GST is the ability to claim input tax credit on all raw materials purchased under works contracts. This feature enables businesses to offset the taxes they paid on inputs against the GST they need to remit, reducing their overall tax liability and promoting tax efficiency.
Incorporating GST in Labour Costs and Contracts
GST plays a crucial role in labour-related agreements and transactions. Mentioned below is impact of GST rates on labour charges and the key considerations:
1. GST Inclusion in Labour Costs
GST rates on labour charges apply in almost every agreement that involves the provision of services or the hiring of workers, unless explicitly stated otherwise in a notification approved by the GST Council. Essentially, all monetary transactions related to services fall under the purview of GST, with some exceptions, such as the purchase or sale of securities and currency exchange for deposit conversions. In essence, GST rates on labour charges are a normal scenario.
2. Pure Labour Contracts
In the case of a pure labour contract, GST rates on labour charges apply on the provision of labour services. This encompasses scenarios where workers are supplied to fulfil specific tasks or provide labour services without any involvement of goods or materials.
3. Unique Considerations in Pure Labour and Works Contracts
Pure labour and works contracts have their own unique characteristics and considerations under GST regulations. Understanding these differences is vital for both service providers and recipients.
4. Calculating Total GST on Labour Costs
When determining the GST applied to labour expenses, it’s essential to consider the value of supplies involved, as mandated by the GST Act. Typically, all fees and taxes are included in the value of a transaction, with the exception of CGST, SGST, etc.
Final Thoughts
Goods and Services Tax or GST is a central factor in labour-related agreements and transactions. It encompasses a wide range of services and labour contracts unless specifically exempted by the GST Council. Pure labour contracts involve the provision of labour services and are subject to GST. Unique considerations apply to both pure labour and works contracts, requiring a thorough understanding of the distinctions. When calculating GST rates on labour charges, the value of supplies plays a crucial role, incorporating various charges except for specific taxes. Overall, this transition to GST has simplified the taxation of labour costs, benefiting businesses and consumers alike, while the input tax credit facility further enhances tax efficiency.
