The Ministry of Skill Development and Entrepreneurship (MoSD) has proposed classifying manpower services as “merit services” under the Goods and Services Tax (GST) regime. If accepted, this could reduce the GST rate on these services from 18% to 5% making them more affordable for businesses and potentially transforming the labor market.
According to The Hindu, the Ministry is urging the Finance Ministry to push for the change explaining that it would help formalize the sector, promote job creation, and align with the government’s skilling and employment initiatives. The proposal is part of MoSD’s budget representation and is expected to be forwarded to the Fitment Committee of the GST Council for consideration.
Currently, manpower services for supplying workers are taxed at 18% applicable to both private and government entities. Exceptions exist for services provided to Panchayats or Municipalities under Articles 243G and 243W of the Indian Constitution. Industry experts states that the high tax rate increases costs for businesses and discourages smaller enterprises from formalizing their operations, keeping a large portion of the workforce in the informal sector.
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The Indian Staffing Federation (ISF) representing the manpower outsourcing industry has endorsed the proposal pinpointing its potential to drive formalization and long-term revenue growth. ISF estimates that the current GST revenue from 54 lakh temporary workers earning an average salary of Rs. 18,000 is Rs. 24,000 crore. Reducing the rate to 5% would initially lower revenue to around Rs. 6,700 crore but formalizing the sector could ultimately increase GST collections to Rs. 50,000 crore as more businesses and workers enter the formal economy.
The MoSD’s proposal is also in line with the government’s broader agenda of boosting employment and livelihoods. A lower GST rate could help bridge the gap for entry-level job seekers especially those earning below Rs. 20,000 per month.
ISF supports the reclassification of manpower services as merit services, it also suggests a different approach where only certain types of employment services are included based on their societal and economic impact. The decision is in the hands of the GST Council after assessing recommendations from the Fitment Committee.
This proposal has the potential to greatly impact job creation, social security, and long-term GST revenues making it an important point of discussion for the upcoming budget deliberations.
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