Skill Ministry asks for lower GST for Manpower Supply

The Ministry of Skill Development and Entrepreneurship (MoSD) has requested that manpower services be classified as ‘merit services’ for GST applications. Acceptance of such a proposal is anticipated to reduce the GST rate to 5% from the current rate of 18%.

At the same time, the Indian Staffing Federation (ISF), an industry association that represents the manpower outsourcing industry, claims that lowering the GST rate will lead to further formalisation of the sector, resulting in a bigger GST mop-up.

“Looking for merit service status for manpower supply is going to be part of MoSD’s budget representation, which will soon be submitted to the Finance Ministry,” a senior government official disclosed.

Manpower services for the supply of workers are subject to an 18% GST rate, which applies to both commercial and government organizations. However, services provided to Panchayats or Municipalities under Articles 243G and 243W of the Indian Constitution are excluded from GST.

Although the Budget cannot change the GST rate, the Finance Ministry may submit such a request to the GST Council’s Fitment Committee. Based on the Committee’s recommendations, the Council will make a final decision.

In the meantime, the ISF has proposed classifying employment services as ‘merit services’ with a 5% GST slab tax rate and linking skilling activities to employment. According to their estimate, 54 lakh temporary workers earn an average pay of Rs. 18,000, generating more than Rs. 24,000 crore in GST revenue. Lowering the rate will reduce this to roughly Rs. 6,700 crore, while formalising the industry might increase GST collection to around Rs. 50,000 crore.

“The ongoing conversation on reducing GST rates for the employment industry may play a major role in the formalisation of jobs within the Indian economy by alleviating the compliance burden on small businesses,” the association claimed.

Many of these businesses are now operating in the informal sector, where the expense of tax compliance might be prohibitive. Lower GST rates make formal registration more appealing, encouraging enterprises to move into the official sector.

According to Suchita Dutta, Executive Director of the Indian Staffing Federation, organised contract staffing organizations play an important role in bridging the gap between job seekers and employers by providing access to benefits such as Employee State Insurance (ESI) and Provident Fund (PF).

“This would ensure better social security coverage for workers, reducing the burden on government resources during crises,” she added.

Furthermore, she proposed that while not all employment services can be designated as “merit services,” there should be separate classifications based on their influence on human lives and economic growth. Services, just as goods, must be categorized into different GST slabs based on their relevance and contribution to society. Employment services, which directly affect livelihoods and job development, demand special attention.

Jobseekers who enter the job market (with incomes below minimum Rs. 20,000) are typically drawn into informal employment due to a lack of opportunity and access to the skilling ecosystem and/or education.

“The staffing sector connects these job seekers from the grassroots level to formal employment, providing them with their first official job opportunity. This means that people with limited access to formal education and skills find their initial step into a career opportunity through a formal contract staffing organization,” she explained.