GST, PF and ESI compliance for manpower supply and staffing agencies

What makes staffing compliance different

A manpower agency is a business with a 5–10% margin and a 100% liability. Almost everything you invoice is somebody else's wages, but every statutory obligation attached to those wages is yours — and, in the event you default, is also the principal employer's. That asymmetry defines the sector.

It also creates a permanent cash mismatch. Wages, PF and ESI go out by the 15th. The client pays in 45 to 60 days, sometimes 90. GST on the gross invoice is payable by the 20th of the following month whether or not the client has paid. So the agency funds a month or two of the entire wage bill plus tax out of a margin that is a fraction of it. Anything that delays collection — a disputed attendance sheet, a missing compliance document — compounds directly into a funding problem.

The traps that actually cost money

GST is on the gross, and pure agent almost never works

The single most common misconception in this trade is that if you show wages and service charge separately on the invoice, GST applies only to the service charge. It does not.

Section 15 of the CGST Act values a supply at the transaction value — everything the recipient pays for the supply. Rule 33 carves out expenditure incurred as a "pure agent", but the conditions are strict: you must make the payment on authorisation from the recipient, to a third party, the payment must be separately indicated on the invoice, and the supply procured must be in addition to your own supply. Wages paid to your own employees fail on almost every limb — the workers are on your rolls, the payment is not to a third party on the client's behalf, and the wages are the very thing you are supplying.

Advance rulings have consistently held that a manpower agency cannot escape GST on the gross value by splitting the invoice. There is a contrary strand — a West Bengal AAR excluded the employer's share of EPF and ESI from the value of supply on particular facts — and some practitioners rely on it. We do not treat that as a safe general position, and we say so directly to clients: on the mainstream view, 18% applies to the full billed amount including wages. If you want to argue otherwise for a specific contract, that is a considered litigation position, not a default.

Two related points. Exemptions for services to government bodies in relation to functions under Articles 243G and 243W have been progressively narrowed and should not be assumed — check the specific entry against the specific recipient. And where a body corporate receives security services from a non-body-corporate, GST is on the recipient under reverse charge; plain manpower supply is not covered by that entry, which is a distinction agencies doing both routinely get wrong.

The Finance Act 2026 change to the definition of "work"

This is the one genuinely new thing in the sector this year, and it is good news.

For years there was a fight over whether payments to a manpower agency attracted TDS at contractor rates or at the higher technical-services rate. Deductors took inconsistent positions; agencies had 10% deducted where 1–2% was appropriate and spent the year chasing refunds, with the working-capital consequences that implies for a business running on a 7% margin.

The Finance Act 2026 amended section 402(47) of the Income-tax Act 2025 — the definition of "work" — to expressly include "supply of manpower to a person to work under his supervision, control or direction", with effect from 1 April 2026. That places manpower supply squarely within section 393(1) Table Sl. 6, the successor to section 194C, at 1% for individual and HUF payees and 2% for others, rather than the technical-services entry.

The practical work now is client-facing: getting your principal employers to actually apply the correct rate from FY 2026-27, since deductor systems change slowly. The qualifying words matter — "under his supervision, control or direction". Arrangements that are genuinely outcome-based rather than headcount-based, where you control the work and deliver a result, may sit outside this and be characterised differently. How the contract is drafted now carries real consequence.

PF and ESI, and the new wage definition

EPF applies at 12% employer and 12% employee on basic wages, dearness allowance and retaining allowance, with the statutory wage ceiling; ESI applies at 3.25% employer and 0.75% employee below the wage threshold. Both are due by the 15th.

Since 21 November 2025, when the four labour codes came into force, the Code on Wages definition of "wages" applies: where the excluded components exceed 50% of total remuneration, the excess is added back to wages for computing statutory benefits. For staffing agencies that historically kept basic low and allowances high to hold down PF cost, this is a direct increase in the contribution base — and therefore in the cost of every existing contract priced on the old assumption. Contracts with fixed rates and no statutory-change clause absorb that increase out of margin.

We also flag that the codes are in force but the state rules under them are not uniformly notified, and draft central rules were issued during 2026. There is real procedural uncertainty in this transition. Where a practitioner tells you the position is fully settled, ask which state's rules they have read.

Contract labour licence and principal-employer liability

The old Contract Labour (Regulation and Abolition) Act required contractor licensing and principal-employer registration at twenty workers. Contract labour regulation now sits within the Occupational Safety, Health and Working Conditions Code, which raises the threshold to fifty contract workers. Whether your existing licences carry forward, and what the renewal procedure is, depends on the state rules — which is a live question in several states, Rajasthan included.

What has not changed is section 21 liability in substance: if the contractor does not pay wages, or does not remit PF and ESI, the principal employer must, and can recover from the contractor. This is why your clients ask for documents. Building a monthly compliance pack — ECR acknowledgement, ESIC challan, wage register, attendance — and sending it with the invoice rather than after a chaser is the difference between 45-day and 90-day collection.

What we do for staffing clients

We start with the contract and the pricing. A staffing agreement that does not contain a statutory-change clause, does not define the billing base clearly, and does not specify what compliance evidence triggers payment is an agreement that will cost you money. We redraft those terms and we rebuild the rate card so that GST, PF, ESI, bonus, gratuity provision and leave encashment are all in the number you quote — because agencies lose money by quoting a margin over wages and then discovering the statutory load was higher than assumed.

Monthly, we run the whole cycle: payroll processing against attendance, PF and ESI computation on the post-codes wage definition, ECR and ESIC challan generation and filing, GST invoicing on the correct value with the reverse-charge entries where they arise, GSTR-1 and 3B, and the client compliance pack assembled and issued with each invoice.

On direct tax, we handle TDS deducted by you on sub-contractors and the reconciliation of TDS deducted by your clients — which is a bigger job in this sector than most, because Form 26AS mismatches from clients using the wrong section are the norm, and from FY 2026-27 there is a rate change to police. We also handle the section 63 audit and the return.

Where you are facing a PF inspection, an ESI recovery notice or a GST valuation query on the pure-agent point, we handle the representation.

What it costs

Per-employee rates fall with headcount. Where you run multiple states, each additional registration adds to the base. We quote after seeing one month of your actual payroll and invoicing.