GST on Labour Contractor — 18% Manpower Supply, RCM & ITC Rules

Labour contractor services (supply of manpower/labour): 18% GST (SAC 9985 — support services). Pure labour supply = providing workers to clients who direct and control their work. Examples: factory labour contractors, security services, housekeeping services, construction labour contractors. SAC breakdown: SAC 998511 — Executive/retained personnel search: 18%. SAC 998512 — Permanent placement services: 18%. SAC 998513 — Contract staffing: 18%. SAC 998514 — Temporary staffing: 18%. SAC 998515 — Long-term staffing/payrolling: 18%. SAC 998519 — Other employment and labour supply: 18%. No GST exemption for labour contractor services (even to government). Exception: pure services to government — EXEMPT only if no element of goods supply involved. Agricultural labour supply for farm operations: SAC 9986 — EXEMPT (specific exemption for agricultural labour). Security services to registered persons: 18% GST under Reverse Charge (recipient pays GST).

Reverse Charge Mechanism (RCM) on specific labour services: Security services (guarding, security personnel): RCM applies — the registered RECIPIENT (company/business) pays 18% GST directly to government, not the security agency. Exception: If the security agency is registered for GST, RCM does NOT apply — security agency charges GST at 18% on invoice. Housekeeping services to registered persons: 18% GST — if housekeeping agency is registered, they charge GST. If housekeeping agency is unregistered and provides services to a registered business: RCM applies to the recipient. Cleaning and maintenance services: 18% GST. Cook supply services: 18% GST. Driver supply: 18% GST. Practical impact: companies hiring unregistered labour agencies must pay GST on RCM basis and file it in GSTR-3B Table 3.1(d). They can also claim ITC on such RCM paid. Employees: NOT liable to GST — employer-employee relationship is NOT a supply under GST.

ITC for registered labour contractors: Labour contractors (18% GST on services) CAN claim ITC on: Office rent (18% GST): eligible. Computer/software (18% GST): eligible. Professional fees for CA/lawyer (18% GST): eligible. Advertisement and marketing: eligible. Mobile/internet expenses: eligible. Commercial vehicle hired for transport of labour: eligible (since used for business). BLOCKED ITC (Section 17(5)): Personal cars (< 13 seats): NO ITC. Food, beverages, outdoor catering: NO ITC (unless in specific business). Employee benefits (club memberships, health club, cosmetic surgery): BLOCKED. Work uniforms supplied to workers: eligible ITC (used in course of business). PF/ESI contributions: no GST on these, no ITC issue. Net GST payable = 18% charged on invoices to clients − ITC on business expenses. Labour contractors must maintain proper GST records, issue invoices, file GSTR-1 monthly/quarterly and GSTR-3B monthly.

Labour supply models and GST: Pure labour supply / Contract staffing: Labour contractor provides workers to client; client directs work. GST: 18% on total billing. Service base: billing includes worker salary + contractor margin. GST charged on full amount (salary + margin). PEO (Professional Employer Organization): PEO co-employs workers; manages payroll, compliance. GST: 18% on management fee only (if structured as salary passthrough + management fee). Better structure for clients. Payroll processing services: 18% GST on payroll service fee only (not on salary amount). Placement fees: 18% GST on one-time placement fee. Temp-to-perm conversion fee: 18% GST. Compliance: Section 194C — TDS on labour contractor payments: 1% (individual/HUF), 2% (others) if total payments > ₹30,000/year to single contractor or ₹1L aggregate. PF/ESI: labour contractor must deduct and deposit PF/ESI for contract workers. Non-compliance: principal employer (client) becomes jointly liable.

Salary to workers — GST treatment: Salary paid directly to employees: NO GST (employer-employee is NOT a supply). Salary reimbursed by client to contractor (for contract workers on client site): This is a grey area — courts have held that if salary is a PURE REIMBURSEMENT (actual cost passthrough, no markup), it may not attract GST. BUT in practice, most labour contractors structure billing as: total invoice = worker cost + contractor margin, all at 18% GST. Safer approach: don't separate salary in invoice — charge 18% on total. If you want to separate: maintain clear documentation showing exact salary reimbursement with payslips, bank transfer proofs. Labour supply to government: 18% GST applies. PF/ESI employer contribution (12% PF, 3.25% ESI): NO GST on statutory contributions. GST registration threshold: labour contractors with turnover > ₹20L must register. Inter-state supply: if supplying labour across state borders, mandatory registration regardless of turnover.