Direct Taxation Under Indirect Tax: Unjust GST Burden On India’s Poorest

As India’s employment landscape evolves, secure government jobs, once symbols of stability and upward mobility, are rapidly giving way to contractual roles lacking security or long-term prospects. This shift has hit low-income workers the hardest, especially those hired through manpower recruitment agencies. Even private companies now prefer hiring through contractors, as it helps them avoid obligations like wage hikes or employment benefits.

GST: A System Meant for Simplification, Now a Source of Exploitation:

While GST was introduced to simplify and unify India’s complex indirect tax system. However, its application to manpower supply services has had an unintended and unjust consequence: low-wage workers now bear the brunt of a tax designed for businesses. Under current rules, even the wages paid to workers through manpower agencies are subjected to GST,  an illogical carryover from the Service Tax era.

This means that a worker’s full wage—₹100, for instance—is treated as if it is the agency’s service income and taxed accordingly. With GST at 18% and agency administrative fees typically 5–7%, workers often end up receiving only ₹75–80, despite ostensibly earning ₹100. This defies the basic principle of Indirect Taxation i.e. subjecting wages to GST.  Wages, being personal income, are meant to be taxed under direct tax laws, not subjected to GST as if they were part of a commercial supply of service.

Another disheartening aspect of this system is the way it treats contractual workers themselves. A worker who has spent years on the job is often paid the same as someone newly hired, with no recognition of experience, no incentive for upskilling and no prospect of long-term security. This erodes morale and discourages skill development, while the tax system silently compounds their exploitation.

A Misunderstood Supply: Workers Are Not Providing a Taxable Service

There is a strong argument that manpower agencies are, in substance, merely acting as intermediaries—pure agents—who facilitate wage disbursement on behalf of the principal employer. In such scenarios, only the commission or service fee retained by the agency should attract GST. Yet, the current framework taxes the entire billed amount, including the worker’s wage, by treating it as a bundled service.

This misclassification harms those at the bottom of the economic pyramid—security guards, sweepers, gardeners, data entry operators and other essential workers—who already earn the bare minimum and lack upward mobility. To worsen the matter, even genuine reimbursements such as travel or uniform allowances are now being brought under the GST net through notices and audits.

Where the GST Law Gets It Wrong

This anomaly stems from a failure to distinguish between two separate elements in a manpower agency’s invoice:

• The worker’s wage – which does not constitute a “supply” under Section 7 read with Schedule III of the CGST Act, 2017, where services provided by an employee to the employer in the course of employment are expressly excluded from the scope of GST.
• The agency’s administrative fee – which is rightly considered a taxable service under Section 7(1)(a) and Section 15 of the CGST Act, as it represents the actual value of the service supplied.

By taxing both components at 18% under a single classification of “manpower supply service,” the law effectively penalizes the worker for the method of their employment. It creates a scenario where workers are treated as service providers merely because their salaries are routed through an intermediary, despite their role being substantively the same as that of a direct employee.

Worse still, this flawed approach results in unequal treatment: if the same worker is hired directly by the service recipient, no GST is levied on the wages paid, in line with Schedule III. But when the very same individual is deployed through a manpower agency, their wage becomes taxable, not because of what they do, but because of how they are hired. This artificial distinction underscores the structural inequity embedded in the current GST framework.

A Legacy That Demands Reform

The practice of taxing the entire contract value, including workers’ wages, was inherited from the Service Tax era. Unfortunately, GST continued this approach without reevaluating its fairness or alignment with the new tax framework. What should have been a fresh start instead preserved a structural flaw, one that now disproportionately burdens the most vulnerable segment of the workforce. With the benefit of hindsight and nearly eight years of GST experience, it’s time to correct this legacy and bring the law in line with its intended principles.

Proposed Solutions:  Exempting Salaries from GST

To address this systemic flaw and prevent the exploitation of low-wage workers, following reforms should be considered:

• Separate Wage and Administrative Charges in Contracts: Contracts between manpower agencies and service recipients must clearly distinguish between the wages paid to workers and the agency’s administrative charges. This would ensure transparency and protect workers from having their wages subjected to unnecessary taxation.
• Exempting Wages from GST: The salary component of manpower services should be exempt from GST. Only the administrative charges levied by the manpower agency should be subject to GST. For instance, if an agency charges 5% as its administrative fee, the 18% GST should apply only to that 5%, not the entire wage bill.

These changes would align the GST framework with the broader goals of social equity and legal fairness.

Conclusion: A Step Towards Fair Wages and Social Justice, Not Just Revenue

The current tax treatment of manpower supply services is not merely a policy oversight, it’s a social injustice. The wages of India’s most vulnerable workers are being subjected to GST.

It’s time to draw a clear line between the labourer and the intermediary. Let the tax fall where the service lies—on the agent’s fee, not on the sweat of the worker.

Correcting this anomaly will not cause a dent in revenue. But it will make a world of difference in the lives of millions who keep India running; quietly, diligently and with little recognition.

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 Acknowledgment: I would like to express my heartfelt thanks to Mr. Ajay Singh—my friend, colleague, and now partner at M/s. Utkrisht Solutions—for his valuable inputs and contributions to this article. Ajay and I have known each other since our university days, and as fate would have it, we joined the Department of Customs and Central Excise together in January 1993. Over the decades, our friendship steadily grew into a deep bond built on mutual respect and shared professional values. In January 2023, I took VRS and Ajay followed suit in July 2023. The following month, we came together to launch our firm, M/s. Utkrisht Solutions, with a focus on providing litigation and advisory services in the domain of Indirect Taxes—an area where we both have spent the better part of our careers. His insights have helped shape the finer nuances of this article, and I remain grateful for his contin