Staffing services need relief from GST 2.0’s tax inequity that has made gig hiring more attractive

This reform slashed tax slabs from six to mainly two—5% and 18%—eliminating the 12% and 28% brackets, while introducing a 40% rate for luxury and sin goods. The changes aim to curb inflation, enhance compliance and stimulate consumption by reducing costs of essentials and intermediate goods.

Items like household appliances and food staples now attract just 5% GST, potentially saving households up to ₹5,000 annually on average spends. Manufacturing and retail businesses hail the input tax credit (ITC) simplifications, and expect investments to rise.

Yet, not every business has reason to be pleased. Unlike goods, where ITC flows seamlessly under the new slabs, service providers face inverted duty structures—paying higher taxes on inputs than outputs—that lock up working capital and deter bulk deals:

Consider the stark irony for the staffing industry, which supplies temporary and contract workers to fuel India’s labour-intensive economy.

While GST 2.0 lowers rates on goods, its unchanged 18% levy on manpower supply services continues to impose a heavy burden on the formal use of temporary employment. For companies whose final products are in lower rate slabs, this rate inversion could mean forgone input tax credit (ITC), as an ITC pile-up on account of service inputs does not qualify for refunds.

This disparity not only erodes the competitiveness of staffing firms trying to build a formal employment landscape for India, but also tilts the scales toward the gig economy, where freelancers and platform workers evade similar tax rigours.

With the staffing sector generating ₹1.9 trillion in revenue and employing 7.2 million workers in 2024-25, it contributed 0.15% to GST collections— ₹34,000 crore—despite razor-thin gross margins of 2-8% and even lower net profits.

The 18% GST on staffing services inflates client costs by 10-15%, particularly for micro, small and medium enterprises (MSMEs), which comprise 90% of India’s hiring base.

A few reports note a 12% dip in formal temporary placements post-GST 2.0 as clients reroute budgets to gig platforms where effective tax leakage is minimal for short-term tasks.

High compliance costs—monthly filings and reverse charge mechanisms—squeeze staffing agencies further, with administrative costs rising 20% since 2017. This drag will not only hamper the sector’s growth but also perpetuate labour informality, undermining social security for millions.

Sector-wise, the ripple effects are pronounced.

In IT, GST 2.0’s boon for hardware (now at 5%) has spurred device sales, yet staffing bears the brunt. IT firms, employing 40% of temporary workers via agencies, face a 15% cost hike on contract labour, which could lead to an estimated 25% surge in freelance hires on platforms.

Retail and e-commerce, turbocharged by 5% GST on consumer goods, witnessed a festive hiring frenzy—250,000 temporary roles filled in October alone. However, the 18% service tax adds ₹18,000 extra per ₹1 lakh payroll, prompting retail store-chains to pivot 30% of warehouse staffing to gig roles, which bypass formal levies.

Manufacturing, a traditional staffing stronghold, grapples with mixed fortunes. Lower input taxes (such as 5% on steel) cut production costs by 8-10%, enabling 180,000 new factory jobs. Yet, small-scale units, hit by compliance burdens, have shed 200,000 temporary positions since 2017, with GST having contributed to a 15% manpower reduction in textiles sub-sectors.

The automotive sector mirrors this trend. GST 2.0’s rate rationalization on parts (down to 5%) has boosted vehicle output and driven demand for 50,000 temporary assemblers. But manufacturers peg staffing costs at 12% of their overheads, up from 8% pre-reform, leading to a substantial shift towards gig mechanics. This informal pivot saves 10% on taxes but risks quality and safety.

Healthcare, though somewhat insulated, with pharma GST at 5%, has seen staffing strains in ancillary services. Hospitals added 80,000 temporary workers post-reform, but the 18% rate on agency fees inflates budgets by ₹2,000 per worker monthly, pushing 25% towards freelance telemedicine gig workers. The sector’s ₹15,000 crore worth of staffing demand has contracted.

This sector-specific squeeze inadvertently supercharges the gig economy, now placed at 15 million workers and projected to hit 23.5 million by 2030. Gig platforms thrive on GST’s digital push—mandatory invoicing enables ITC claims on tools, reducing effective rates to 5-9% for freelancers below the ₹20 lakh turnover limit.

Unlike temporary staffing’s rigid 18% pass-through, gig employment offers tax anonymity for micro-tasks, attracting MSMEs squeezed by formal costs. A 2025 study reveals that 40% of e-commerce firms now source 60% of their labour via gig supply channels, up from 25% in 2023, citing 12-15% savings.

While gig work promises workers flexibility, it lacks the benefits of temporary employment: provident fund, insurance, skilling opportunities, etc.

Lopsided labour use worsens inequality. Yet, for cash-strapped sectors, the allure is irresistible.

GST 2.0’s consumer-centric reforms, while laudable, expose a policy blind spot: they leave employment services overtaxed amid booming demand. A staffing GST rate of 18% not only hampers formal job creation, but also funnels labour into precarious gig work, which makes it harder for India to develop a better skilled workforce.

The Indian Staffing Federation’s call for a 5% slab merits a response. It will result in little tax revenue loss but will deliver significant employment gains.

As India eyes a $5 trillion economy, taxation must be equitable, with workers and the cause of employment accorded due priority. Temporary roles must not get eclipsed by gig hiring.

The author is executive director of Indian Staffing Federation (ISF)