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Key Highlights
- There are two types of labour contracts - pure labour contracts and works contracts.
- A pure labour contract comprises only labour. On the other hand, works contract is a composite supply of good and services.
- The supply value for GST on labour charges is the transaction value, including taxes and duties except IGST, CGST, and SGST.
- Expenses borne by the recipient on behalf of the supplier are to be included in the supply value.
Goods and Services Tax (GST) is levied on various goods and services. Understanding the applicable regulations simplifies statutory compliances and ensures smooth business operations.In this blog, we bring to light the key aspects of GST on labour charges, the labour charges HSN code and much more. Also Read: How Does GST Work in India?
Types of Labour Contracts
Before discussing the specifics related to GST on labour charges, let’s understand the different types of labour contracts. There are two types of contracts as explained below: Only Labour A contract that comprises only labour service is known as a pure labour contract. In this case, there are no materials involved while providing services. Labour and Material When a contract comprises labour and material, it is a works contract. In this case, there is a composite supply of goods and services.
Impact of GST on Labour Charges
The pre-GST era was characterised by multiple taxes like excise duty, service tax, and VAT (Value Added Tax). Replacing these taxes, GST introduced uniformity in taxation. Thus, you can expect reduced sales consideration and easier compliance with regulations, as compared to the pre-GST era.
Applicability of GST on Labour Charges
GST is applicable on all services unless explicitly exempted by law. Services related to the supply of labour charges which are taxable and exempted are covered in the following sections.
GST on Labour Charges and Labour Charges HSN Code
Here is a tabulation of GST on labour charges and the relevant chapter of labour charges HSN code. These details are available on the Central Board of Indirect Taxes and Customs website.
| Chapter/Heading/Sub-Heading/ Tariff Item*1 | Description | IGST*2 |
| 9954 (Construction services) | (vii) Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax (CGST) Act, 2017, involving predominantly earthwork (that is, constituting more than 75 per cent of the value of the works contract) provided to the Central Government, State Government, [Union Territory or a local authority]37. | 12% |
| 9954 (Construction services) | (viii) Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017 and associated services, in respect of offshore works contract relating to oil and gas exploration and production (E&P) in the offshore area beyond 12 nautical miles from the nearest point of the appropriate baseline. | 12% |
| 9954 (Construction services) | (x) Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017 provided by a sub-contractor to the main contractor providing services specified in item (vii) above to the Central Government, State Government, Union Territory or a local authority. | 12% |
| 9954 | Services provided by way of pure labour contracts of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of a civil structure or any other original works of the beneficiary-led individual house construction or enhancement under the Housing for All (Urban) Mission or Pradhan Mantri Awas Yojana. | Nil |
| 9954 | Services by way of pure labour contracts of construction, erection, commissioning, or installation of original works of a single residential unit otherwise than as a part of a residential complex. | Nil |
Source: https://cbic-gst.gov.in/gst-goods-services-rates.html *1 Get the respective HSN code details at https://services.gst.gov.in/services/searchhsnsac *2 IGST (Integrated Goods and Services Tax) = CGST (Central Goods and Services Tax) + SGST(State Goods and Services Tax)
Supply Value for GST on Labour Charges
Now that we know the rate of GST on labour charges, let’s decode the supply value i.e. the value on which GST is calculated.The supply value is the transaction value which comprises all taxes and duties except IGST (Integrated Goods and Services Tax), CGST (Central Goods and Services Tax), and SGST (State Goods and Services Tax). Also, the expenses borne by the recipient of services on behalf of the supplier of the labour contract are to be included. Deduction towards Employees' Provident Fund and Employees' State Insurance are some examples here.
Follow GST on Labour Charges Rules to Avoid Non-Compliance Issues
It is important to understand the applicable GST on labour charges regulations and use the correct labour charges HSN code to avoid issues related to non-compliance. Besides, ensure that you calculate your GST liability accurately using an online GST calculator.Apart from taxation, regular compliance is essential for other business functions, including the timely repayment of loans.With a variety of loan products available, you can talk to Aditya Birla Capital's representative and choose the loan type that best suits your needs and offers repayment flexibility.
FAQS - FREQUENTLY ASKED QUESTIONS
What are the different types of labour contracts?
There are two types of labour contracts - only labour or pure labour contract and works contracts.
What is the difference between pure labour and works contracts?
A pure labour contract comprises only labour. On the other hand, works contract is a composite supply of good and services.
What is the importance of labour charges HSN code?
Similar to other HSN codes, labour charges HSN code provides a structured framework to classify services, facilitating necessary tax compliance.
How does a labour charges HSN code facilitate regulatory compliance?
The correct labour charges HSN code prevents legal issues related to the misclassification of labour charges.
Where is the labour charges software HSN code available?
You can get the applicable labour charges HSN code on the official website of Central Board of Indirect Taxes and Customs.
How important is it to use the correct labour charges HSN code?
It is crucial to use the right labour charges HSN code to ensure the right classification of labour charges and accurate GST calculation at the right tax rate.
What is supply value?
The supply value for GST on labour charges is the transaction value.
What does the supply value include?
The supply value includes taxes and duties except IGST, CGST, and SGST along with expenses borne by the recipient on behalf of the supplier.
Could you give some examples of expenses borne by the recipient on behalf of the supplier?
Deduction towards Employees' Provident Fund and Employees' State Insurance are some examples of such expenses.
Where can I verify the GST rates on labour charges?
You can verify the GST rates on labour charges on the official website of Central Board of Indirect Taxes and Customs.
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
