The Ministry of Skill Development and Entrepreneurship (MoSD) has recommended categorizing manpower services as “merit services” within the Goods and Services Tax (GST) system.
If approved, this reclassification could lower the GST rate on such services from 18% to 5%, making them more affordable for businesses and possibly reshaping the labour market.
According to the sources, the Ministry has urged the Finance Ministry to advocate for this move, highlighting that it would help standardize the sector, support job creation, and align with government initiatives on skill development and employment. This recommendation is part of MoSD’s budget submission and is expected to be reviewed by the Fitment Committee of the GST Council.
At present, manpower services for supplying workers are taxed at 18%, which applies to both private and public entities. There are some exceptions, such as services provided to Panchayats or Municipalities under Articles 243G and 243W of the Indian Constitution.
Experts suggest that the high tax rate raises costs for businesses and discourages smaller firms from formalizing their workings, keeping much of the workforce in the informal sector.
The Indian Staffing Federation (ISF), which advocates for the manpower outsourcing sector, has supported the proposal, praising its potential to promote formalization and sustainable revenue growth. As per the estimation of the ISF, the existing GST revenue is 24,000 crore from 54 lakh temporary workers earning an average of Rs. 18,000 per month.
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Lowering the rate to 5% would initially reduce revenue to about Rs. 6,700 crore, but formalizing the sector could end up boosting GST earnings to Rs. 50,000 crore as more businesses and workers transition into the formal economy.
The MoSD’s proposal also aligns with the government’s broader goals of increasing employment and improving livelihoods. A reduced GST rate could make entry-level jobs more accessible, especially for those earning less than Rs. 20,000 per month.
While ISF supports the reclassification of manpower services as merit services, it also proposes an alternative approach, where only specific types of employment services are involved based on their societal and economic significance. The final decision will rest with the GST Council after it considers the recommendations from the Fitment Committee.
This proposal could have a significant impact on job creation, social security, and long-term GST earnings, proving it to be a key topic for discussion during the upcoming budget gathering.
