Industries · Manpower & Staffing
Manpower & Staffing
18% GST on the gross bill, PF and ESI, contract labour licensing
A manpower agency is a business with a 5 to 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, if you default, the principal employer’s as well. Wages, PF and ESI go out by the 15th, GST on the gross invoice is payable by the 20th of the following month, and the client pays in 45 to 90 days.
We run the whole monthly cycle: payroll processed against attendance, PF and ESI computed on the post-codes wage definition, ECR and ESIC challan generation and filing, GST invoicing on the correct value with reverse-charge entries where they arise, GSTR-1 and 3B, and the client compliance pack assembled and issued with each invoice rather than after a chaser. We also rebuild rate cards so that GST, PF, ESI, bonus, gratuity provision and leave encashment are inside the number you quote.
Compliance challenges we solve
GST applies to the gross bill
Section 15 values a supply at everything the recipient pays. Splitting wages from service charge does not reduce it, so 18% applies to the full billed amount.
PF, ESI and the new wage definition
Since 21 November 2025 excluded allowances above 50% of total remuneration are added back to wages, raising the contribution base on every contract priced before the change.
Contract labour licensing in transition
Regulation has moved from the CLRA to the OSH Code and the licensing threshold has risen from twenty to fifty contract workers, with state rules not uniformly notified.
Principal-employer liability
If you do not remit PF or ESI, your client must and then recovers from you — which is why invoices sit unpaid until the ECR acknowledgement and ESIC challan arrive.
A 7% margin carrying a 100% liability
Almost everything a staffing agency invoices is somebody else’s wages, yet every statutory obligation attached to those wages sits with the agency — and, on default, with the principal employer too. That asymmetry defines the sector and explains why clients ask for compliance documents before they pay.
It also creates a permanent cash mismatch. Wages, PF and ESI leave by the 15th. GST on the gross invoice is payable by the 20th of the following month whether or not the client has paid, and the client typically pays in 45 to 90 days. The agency therefore funds a month or two of the entire wage bill plus tax out of a margin that is a fraction of it, so anything that delays collection — a disputed attendance sheet, a missing document — compounds straight into a funding problem.
Why the pure-agent argument does not work
The most common misconception in this trade is that showing wages and service charge separately on the invoice confines GST to the service charge. Section 15 values a supply at the transaction value — everything the recipient pays for the supply — and Rule 33 carves out only expenditure incurred as a pure agent, on the recipient’s authorisation, paid to a third party, separately indicated, and for a supply additional to your own.
Wages paid to your own workers 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 being supplied. Advance rulings have consistently held that a manpower agency cannot escape GST on the gross value by splitting the invoice. We treat 18% on the full billed amount as the default and quantify the exposure before anyone argues otherwise.
PF, ESI, licensing and the TDS change
EPF runs at 12% employer and 12% employee on basic wages, dearness allowance and retaining allowance within the statutory ceiling; ESI at 3.25% and 0.75% below the wage threshold; both due by the 15th. Since the four labour codes came into force on 21 November 2025, the Code on Wages definition adds back excluded allowances above 50% of remuneration, raising the contribution base — and contracts without a statutory-change clause absorb that out of margin.
The one clearly good development is on direct tax. The Finance Act 2026 amended the definition of ‘work’ in section 402(47) to include supply of manpower to work under the recipient’s supervision, control or direction from 1 April 2026, placing agency billing squarely within section 393(1) Table Sl. 6 at 1% or 2% rather than the technical-services entry. The qualifying words matter, so how the contract is drafted now carries real consequence.
Frequently asked
Can I charge GST only on my service charge and not on the wages I pass through?+
On the mainstream position, no. Section 15 values the supply at everything the recipient pays, and the Rule 33 pure-agent exclusion requires payment to a third party on the recipient’s authorisation — wages to your own employees do not qualify, because the workers are on your rolls and the wages are the very thing you are supplying. Advance rulings have repeatedly rejected the split-invoice approach. There is one contrary strand excluding the employer’s share of EPF and ESI on specific facts, but relying on it is a litigation position, not a compliance plan.
What TDS rate should my clients deduct from FY 2026-27?+
Contractor rates — 1% where the payee is an individual or HUF, 2% otherwise — under section 393(1) Table Sl. 6, the successor to section 194C. The Finance Act 2026 amended the definition of ‘work’ in section 402(47) to expressly include supply of manpower to work under the recipient’s supervision, control or direction, with effect from 1 April 2026, which settles the old 194C-versus-194J argument for headcount-based deployment. If a client is still deducting at technical-services rates, we provide a standard letter citing the amendment.
My client is withholding payment until I give PF and ESI proof. Are they entitled to?+
They are protecting themselves, and the law gives them reason to. The principal employer is liable for the wages, PF and ESI of contract workers if the contractor defaults, with a right of recovery afterwards that they would rather not have to exercise. The workable answer is to make the compliance pack part of the invoice — ECR acknowledgement, ESIC challan, wage register and attendance issued with the bill — so there is nothing left to ask for. Agencies that do this collect materially faster.
Have the labour codes changed my PF cost?+
Very likely upward. Since 21 November 2025 the Code on Wages definition applies, under which excluded allowances exceeding 50% of total remuneration are added back into wages for computing statutory dues. If your salary structures kept basic low and allowances high, the contribution base rises. Contracts priced before that change and lacking a statutory-change clause absorb the increase out of your margin, so the first thing to check is your existing rate cards, not your payroll software.
What are the PF and ESI rates and due dates?+
EPF applies at 12% employer and 12% employee on basic wages, dearness allowance and retaining allowance, subject to the statutory wage ceiling. ESI applies at 3.25% employer and 0.75% employee below the wage threshold. Both are due by the 15th, which is what creates the cash mismatch when the client pays in 45 to 90 days.
Do I still need a contract labour licence?+
Contract labour regulation has moved from the CLRA to the Occupational Safety, Health and Working Conditions Code, in force since 21 November 2025, with the licensing threshold raised from twenty to fifty contract workers. Whether existing licences carry over and how renewal works depends on state rules, and those are not uniformly notified — Rajasthan included. Until that settles, we advise keeping existing registrations alive and renewing on the old cycle rather than assuming they have lapsed into irrelevance.
Is manpower supply covered by the security services reverse charge?+
No, and agencies doing both get this wrong routinely. Where a body corporate receives security services from a non-body-corporate, GST is payable by the recipient under reverse charge. Plain manpower supply is not covered by that entry and remains on forward charge at 18%. If you invoice both, the two lines have to be treated differently on the same bill.
Are my services to government bodies exempt?+
Do not assume so. Exemptions for services to government bodies in relation to functions under Articles 243G and 243W have been progressively narrowed, and the entry has to be checked against the specific recipient and the specific function. We read the notification against your actual contract before you price the work, because an exemption assumed and later denied is recovered from your margin.
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