Taxation implications on Payment of Labour Change

Taxation implications on Payment of Labour Change

• The Labour contractor is not registered under Goods & Service Tax: In case Supplying agency is not registered under Goods and service Tax Act, Service receiver should charge Goods and service Tax under RCM Mechanism.
• Labour contractor registered under Goods and service Tax: In case supplier agency is registered under Goods and service Tax,  Agency should charge Goods and service Tax for labour supply. It can also claim the ITC for the supplier agency.

UNDER THE GST – REVERSE CHARGE MECHANISM ON LABOUR PAID:

The applicability of Reverse Charge Mechanism on labour charges depends on the nature of the labour services provided:

1. If the labour services are provided by an employee to the employer in the course of or in relation to his employment, then these services fall under Schedule III to the CGST Act, 2017 and are not taxable.
2. If, manpower supply or labour supply services by a manpower supply agency falls under SAC 98519 and is taxable at 18%. This tax has to be paid by the manpower supply agency.

Service Accounting Code (SAC)	Nature of Service	GST on Labour Charges
998515	Long-term staffing or payroll	18%
998516	Temporary staffing-to-permanent placement	18%
998513	Contract staffing	18%
998517	Co-employment staffing	18%
998518	Other employment and labour supply
998511	Retained or executive personnel search	18%
998512	Permanent placement	18%

FAQ ON REVERSE CHARGE MECHANISM ON LABOUR PAID:

Question : Is Reverse Charge Mechanism applicable to daily wages, Labour Charges and Contract Labour?

Ans : No

Question : Whether there is any limit on the percentage of material to be used in project for Eg: cement 15%, sand 10% etc?

Ans : No

Question : Whether Salaries, Incentives, Brokerage, Remuneration and interest on Working Capital are liable

for RCM?

Ans : No

Question : In a project of combination of affordable Flats (Carpet Area is less than 60Sq Mts), and Non affordable flats (Carpet Area is more than 60Sq Mts), can different rate of tax be adopted for different units, i.e., GST 1% in case of affordable Units and 5% in case of Non affordable units based on the Carpet area?

Ans : Yes

Question: While calculating 80% of Value for Inputs and Input Services we have to consider labour charges also ? What if contractor is not registered but promotor have taken labour servies from him without gst i.e. from unregistered supplier of services.? Need to pay RCM on Labour Services Short-fall ?

Ans: Yes

Question : Is a Private Limited Company can pay cash Labour charges?

Ans : According to the Provision of income tax law , Yes,  A Private Limited Company can pay cash for labour charges, However there are certain restrictions under the Income Tax Act, 1961:

• As per Section 40A(3) & 40A(3A): The monetary limit on revenue expenditure in cash has been reduced from Rs. 20,000 to Rs. 10,000. There are also some exceptions to Rule 6DD of the Income Tax Rules.
• According to Section 269ST: Any person who enters into a transaction of Rs 2 lakh or more in cash will be liable to a penalty of an amount equal to the amount of the transaction.
• As per Penalty under Section 271DA: The penalty will be levied on a person who receives Rs 2 lakh and above in cash. There will be an amount of penalty equal to the amount of such receipt.

Business Disallowance – Cash Payment exceeding prescribed Limits- Section 40A(3) oF the Income-Tax Act, 1961:

• Following decision made in the matter of Gali Subba Raju v. Assistant Commissioner of Income Tax, Circle – 1(1) – [2021]
• Computation of limit : Where AO made disallowance u/s 40A(3) in respect of labour charges of Rs. 18 lakhs paid in cash by assessee, in view of fact that payment was not made on a single day to a single person & it was only a transfer entry for labour charges paid to various workmen at site & all payments were below INR 20k to each individual, impugned disallowance u/s 40A(3) was to be deleted –

New Labour Codes (NLC),

The New Labour Codes (“NLC”), a much-awaited labour reform, has subsumed 29 existing labour laws and consolidated the same under four new codes, namely :

• The Code on Social Security, 2020;
• Occupational Safety, Health & Working Conditions Code, 2020
• The Code on Wages, 2019;
• Industrial Relations Code, 2020;

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