The implementation of the Goods and Services Tax (GST) in India has revolutionized the management of indirect taxation for businesses and people alike. One such sector where GST is an important factor in labour charges is an essential ingredient for manufacturing units, construction companies, and other service providers. Familiarity with the GST on Labour Charges: HSN Code, Calculation, & Exemptions is required for compliance and financial decision-making.
Understanding Labour Charges under GST
Labour charges normally pertain to the fee paid for manual labour or service involving physical effort. Such charges are incurred in various sectors, such as construction, mechanical repair, fabrication, and installation.
In GST, labour charges will normally be considered a supply of service and hence taxable unless otherwise exempt. It becomes taxable based on:
The type of work
- Whether the material is part of the contract
- Whether the activity is classified as a composite supply or a pure labour supply
HSN Code for Labour Charges
The HSN (Harmonized System of Nomenclature) Code facilitates the classification of goods and services systematically. For labour charge type of service, the Service Accounting Code (SAC) is applied instead of HSN codes (used for goods in general).
Some of the applicable SAC codes for services related to labour are:
SAC Code Description GST Rate
998511 Construction services involving labour 18%
998596 Labour supply services for general works 18%
998719 Maintenance and repair labour services 18%
Note: The GST rates are updated from time to time. Always check the latest CBIC circulars or consult with a tax professional.
Calculation of GST on Labour Charges
- Pure Labour Contract
A pure labour contract is one that contains only manpower and no material supply. In case the work is pure labour and fulfils some government guidelines, it might be eligible for GST exemption.
Example:
A municipal authority employing staff for drain cleaning (pure labour) is exempted under Notification No. 12/2017 – Central Tax (Rate).
GST Calculation:
- If exempt: No GST
- If not exempt:
- For service of labour = Labour charges × GST rate (18%)
Example:
- Labour charge = ₹50,000
- GST = 18%
- Total GST = ₹9,000
- Total Invoice Amount = ₹59,000
- Composite Contract (Labour + Material)
If both labour and material are supplied, it is a works contract, and 18% GST usually applies. This is a composite supply under GST regulations.
Example:
- If the contractor provides tiles and fixes them, then the whole amount (labour + material) is charged at 18%.
- Important Tip: You need to get GST Registration if your turnover during the year is over the threshold limit (₹20 lakh for most states for service providers).
GST Exemptions for Labour Charges
All labour services are not taxed. Various exemptions depend on the type of service, recipient, and contract.
Major GST Exemptions on Labour Fees:
- Government scheme for pure labour services
- Services supplied under schemes such as the Pradhan Mantri Awas Yojana are usually exempt from GST.
Individual service providers for domestic use
If an individual recruits labour for domestic use (not for business), GST is not applicable.
Services under the reverse charge mechanism (RCM)
In certain situations, the recipient has to pay GST under the RCM, particularly in construction services.
Unregistered small service providers
Providers with turnover below the specified threshold (₹20 lakh/₹10 lakh for special category states) are exempt from GST.
Input Tax Credit (ITC) on Labour Charges
Companies that remit GST on labor fees are generally able to claim Input Tax Credit (ITC) when the expenses are incurred for business and are otherwise eligible as per the CGST Act.
Illustration:
- A factory that pays ₹1 lakh labor fees + ₹18,000 GST can claim ₹18,000 as ITC in the GST return filing.
- Remember, Time ITR Filing and Time GST Return Filing enable you to get complete credit and escape penalties.
GST Registration Requirement for Labour Contractors
If you’re a contractor providing labour services and your aggregate turnover exceeds the specified limit (usually ₹20 lakhs per annum), GST Registration becomes mandatory.
Key Documents Required for GST Registration:
- PAN card
- Aadhaar card
- Business address proof
- Bank details
- Photograph of proprietor/partners/directors
- Company incorporation certificate (if applicable)
For newly incorporated firms, it is advisable to complete Company Registration first and then proceed with GST Registration.
Compliance for Labour Service Providers
To remain in line with GST laws, the following are tips that are necessary:
- Issue GST invoices with proper SAC codes.
- File GST returns timely (GSTR-1 and GSTR-3B).
- Pay GST liability in time.
- Keep proper records of invoices and services.
- Avail Input Tax Credit (ITC) where applicable.
- Perform annual GST reconciliation.
Conclusion
Comprehending the GST on Labour Charges: HSN Code, Calculation, & Exemptions is imperative for freelancers, businesses, and contractors. Labour charges are primarily taxed at 18%, but exemptions are available depending on service type and recipient. Proper classification with SAC codes and on-time GST compliance can prevent penalties and keep business operations running smoothly.