How High GST on Temporary Staffing May Push Workers to Take Up Informal Jobs

The 18% GST on temporary staffing services is likely to push workers toward informal or gig roles, with projections indicating a 10–15% contraction in demand for formal temporary workers by the end of current fiscal, according to Suchita Dutta, Executive Director of the Indian Staffing Federation (ISF), an apex body of organised staffing companies.

The GST 2.0 reforms, effective Monday, have rationalised rates on several output goods, cutting them from 18% or 12% to 5% for items such as electronics, textiles, food staples, and auto components, to enhance affordability and stimulate demand. However, temporary staffing services remain taxed at 18%, creating a sharp anomaly. This means that while businesses benefit from cheaper inputs and outputs, they continue to face elevated costs for labour, a critical factor of production.

 “This disproportionately strains cash flows, particularly for MSMEs and consumer-facing industries, and serves as a significant disincentive to formal temporary hiring,” Dutta tells Outlook Business.

Businesses hiring temporary staff through agencies pay 18% GST on the full invoice, which includes both salaries and the agency’s margin, classified as an input service. While Input Tax Credit (ITC) is available, it can only be offset against output GST liability. With GST 2.0 bringing many outputs under the 5% slab, the pool of credits has shrunk, creating a mismatch.

Cash Flow Crunch

The retained 18% GST on staffing has pushed up hiring costs by about 13% compared to the pre-GST 2.0 regime. As a result, temporary staff is now 10–15% costlier, leading many firms to cut back on formal hiring or turn to untaxed informal labour.

For a mid-sized firm with a turnover of around ₹50 crore, this translates into an 8-12% increase in working capital needs, according to ISF estimates, as staffing costs, typically 10-15% of operating expenses; rise further during festive-season hiring surges.

High GST, Dutta argues, worsens seasonal cash crunches. For instance, e-commerce firms expecting a 20–30% sales boost from rate cuts must front-load staffing costs without proportional ITC inflows, putting liquidity ratios at risk of falling by 15–20%. “Small businesses, with limited access to credit, face 10–15% higher default risks due to such mismatches,” she adds.

In fact, for every ₹100 spent on goods (now taxed at 5%, or ₹5), Dutta explains that companies pay ₹18 in GST on equivalent staffing, a 3.6x gap that pushes businesses toward cost-cutting. ISF estimates the high levy drains ₹20,000–30,000 crore annually from business liquidity, acting as a significant disincentive and reducing temporary hires by 10–15% in affected sectors. A shift to the 5% slab, she argues, could unlock up to ₹50,000 crore in cash flows for reinvestment.

“Temporary staffing is not a luxury but a merit service that facilitates formal employment, skill development, and labour market flexibility, core to initiatives like Atmanirbhar Bharat and the National Employment Policy,” says Dutta. “Retaining 18% GST penalises this sector, stifling growth in a country where informal employment still dominates over 80% of the workforce.”

A Formal Investment

In the previous fiscal, the flexi-staffing sector employed 7.2 million workers, earned ₹1.9 lakh crore in revenue, and contributed ₹34,000 crore in GST. If the GST rate is cut to 5%, the industry projects 15–20 million jobs, with 5–10 million of them formalised within 2–3 years. This, Dutta says, could also curb fiscal leakages from informal labour, which is estimated to account for ₹2–3 lakh crore in unreported income each year.

“GST 2.0’s rate rationalisation is projected to boost GDP by 0.5-1% through higher consumption, but excluding staffing risks a ‘hiring lag’ in labour-intensive sectors, worsening unemployment,” says Dutta. “It also widens regional disparities, as southern or eastern states with high flex-staffing adoption suffer more.”

She argues that a 5% GST rate is not a concession but an investment, potentially generating ₹1–1.5 lakh crore in long-term GST revenue through expanded formal employment.

Ahead of the 56th GST Council meeting, the ISF submitted a representation to Finance Minister of State Pankaj Chaudhary, a GST Council member, arguing that employment services contribute just 0.15% to total GST collections. They had contended that lowering the rate would have minimal impact on revenue while providing a significant boost to formalisation of the workforce.