Staffing Services Need Relief from GST 2.0’s Tax Inequity that Has Made Gig Hiring More Attractive

Staffing Services Need Relief from GST 2.0’s Tax Inequity that Has Made Gig Hiring More Attractive

Issue: To highlight how the Goods and Services Tax (GST) 2.0 rate rationalization, despite lowering taxes on goods, maintains a high tax rate on formal manpower supply services (staffing), inadvertently creating a tax inequity that makes informal gig hiring significantly more appealing and cost-effective for businesses, thereby eroding the formal employment base.

Facts:

• GST 2.0 simplified tax slabs but maintained the rate on manpower supply/staffing services at 18%.
• GST 2.0 lowered rates on goods and industrial inputs, reducing costs for manufacturers and retailers.
• The staffing sector, which facilitates formal temporary roles, employs 7.2 million workers and contributed ₹34,000 crore to GST collections in 2024-25.
• Reports indicate a 12% dip in formal temporary placements post-GST 2.0.

Decision:

The GST 2.0 structure has created an economically disadvantageous position for the formal staffing industry due to the high 18% service tax, inadvertently tilting the scales towards the gig economy and perpetuating labor informality.

Key TakeDowns:

• Tax Inversion and ITC Blockage: For companies whose final products are taxed at a lower slab (e.g., retail goods at 5% GST), the high 18% GST on staffing services creates a severe inverted duty structure. Since Input Tax Credit (ITC) accumulated on services often does not qualify for a refund, this locks up working capital and erodes the staffing firm’s competitiveness.
• Cost Differential: The 18% GST on staffing services inflates client costs by 10-15% for manpower, making the formal hiring process expensive, especially for MSMEs (which comprise 90% of India’s hiring base).
• Gig Economy Advantage: The tax disparity incentivizes clients to pivot to gig platforms and freelancers, where effective tax leakage is minimal or where freelancers operate below the ₹20 lakh GST registration threshold. For instance, retail chains are pivoting 30% of warehouse staffing to gig roles to save 10% on taxes. * Call for Rate Cut: The Indian Staffing Federation advocates for lowering the GST rate on formal staffing services to 5% to reduce compliance costs, make formal hiring competitive, and support formal job creation.