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Industry representatives had been urging the government to cut GST on labour charges to 5%, but the request has not been accepted
The GST overhaul has eliminated the 28% and 12% slabs, reducing rates on daily items.
The Goods and Services Tax (GST) structure has undergone a major overhaul, with the Centre scrapping the 28% and 12% slabs and reducing tax rates on almost all items of daily use. The reform promises direct relief to households and is expected to give a push to consumer demand, which in turn could boost the sales of companies across sectors.
However, despite the sweeping changes, the GST Council has left out a key demand from micro, small and medium enterprises (MSMEs). Industry representatives had been urging the government to cut GST on labour charges to 5%, but the request has not been accepted.
C Sivakumar, president of the Coimbatore-Tiruppur District Micro and Cottage Entrepreneurs Association, expressed disappointment, saying that one of the long-pending demands of job-working and subcontracting units in the manufacturing sector has been to reduce the GST on labour charges in job work from previous 12% to 5%. Instead, the government has raised it to 18%, a move he warned will pose serious challenges for micro and small-scale industries dependent on job work.
The Coimbatore District Small Industries Association (CODISSIA) has also voiced concern. In a statement cited by The Hindu, the association urged the government to revisit the decision and create a mechanism that would ensure lower GST rates directly benefit MSMEs. The group warned that small enterprises, which depend largely on labour charges and function as suppliers to bigger firms, would face tighter cash flows, leading to slower work cycles.
According to experts, the 18% GST on labour charges in job work will inflate operational costs for MSMEs, reducing their competitiveness and straining their liquidity. Since many large corporations rely on smaller firms for sub-contracting, the ripple effects of the decision are expected to reach bigger players as well.
Industry insiders argue that continuing with the 18% tax rate could erode the competitiveness of small industries in the long run, even as larger companies benefit from lower GST on finished goods.
What are labour charges?
Labor charges are payments made for labour-based services, which can be structured under two kinds of contracts. A pure labour contract involves only manpower, with the client providing all materials. For instance, if a builder requires only skilled workers for construction, the contractor supplies just the labour. By contrast, a works contract covers both manpower and materials supplied by the contractor.
Under Section 2(119) of the CGST Act, 2017, if a contractor undertakes construction and provides both workers and materials, the arrangement qualifies as a works contract. While GST is not applicable to labour provided for agricultural activities and certain government schemes, it remains firmly in place for industrial job work.
For MSMEs, this continues to be a sticking point. As the government highlights the relief brought to consumers by the latest GST reforms, smaller enterprises remain anxious about the financial strain of unchanged tax rates on labour charges.
September 05, 2025, 11:44 IST
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