As per MSME 18% GST on labor charges will affect the liquidity of small industries. It will also reduce their competitive ability.
The central government has changed the GST structure and reduced GST on almost everything needed by the common man. The 28 percent and 12 percent GST slabs have been abolished. The reduction in GST will benefit the common people. There is every possibility of an increase in the sales of companies. But, the GST Council has not accepted a major demand of micro, small and medium enterprises (MSMEs) this time too. It has not reduced GST on labor charges. MSMEs were demanding to reduce GST on labor charges from 18 percent to 5 percent. Experts say that the 18 percent GST has increased the cost for MSMEs. It not only affects production but will also impact big companies. These big companies get production work done from small enterprises through sub-contracts.
Also read: GST Reforms vs US Tariffs: India Aims to Achieve Balance
This decision of the government has caused deep concern among micro, small and medium enterprises (MSMEs). The industry says that this step will affect the liquidity of small industries and reduce their competitiveness. C. Shivkumar is the President of Coimbatore-Tiruppur District Micro and Cottage Entrepreneurs Association. He stated that job work and sub-contract industries have long sought a reduction in GST rates from the government. The industries demanded that GST on this should be reduced so that small businessmen can get relief.
Companies’ heavy dependency on labour
According to a report in The Hindu, the Coimbatore District Small Industries Association (CODISSIA) has also objected to this decision. The association says that the government should reconsider the rates of job work. The organization has suggested creating a system. This system ensures that the benefit of lower GST rates goes directly to MSMEs. Small enterprises are suppliers of big companies and depend only on labour charges. In such a situation, 18% tax rate will affect their cash flow and work may slow down.
Types of labour charges
Labour charges are the fee paid to a person or group for the labour or effort-based services provided by them. There are two types of labour contracts in labour charges. Pure labour contract and works contract. In pure labour contract, the contractor provides only the labour, while the client provides all the necessary materials himself. For example, if a builder needs only skilled labour for building construction, then the contractor will provide only the labour.
On the other hand, a works contract includes supply of labour services as well as materials. According to Section 2(119) of the CGST Act, 2017, a contractor falls under a works contract. This applies when they provide both labour and construction material for a building project. Labour provided for agriculture and certain government schemes is not subject to GST.
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