Is there any GST liability on a Labor contract, on the consideration received inclusive of ESI & PF from the Contractee Factory?

And paid by the contractor to concerned Department by recovering the same from his contract Laborers?

The GST recovered by the Contractor from his contract Laborers towards ESI and PF is paid to the concerned Department.

He gets them reimbursed from Laborers in the capacity of an Agent.

It is comparable to the Electricity charges reimbursed by the Occupant/tenant to the Landlord since the Electricity charges paid to the Electricity Board by the Landlord is not subject to GST since Landlord acts as an agent. This position has been confirmed in several recent rulings afoot.

As per Sec 15 (1) of the CGST Act, value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both, where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.

So the next question is, when the Labor contractor is collecting total amount as consideration of his supplies and Sec 15 (1) does not speak about inclusion of such elements as ESI/PF explicitly?

Why not exclude ESI/PF by a separate Bill as they are welfare-oriented elements as per the definitions of the relevant Acts?

There’s also a question whether it will be covered under Pure Agent Principle and thus exempted in the hands of the Contractor of the portion comprising WSI/PF in the consideration received from the Contractee Factory.

The answer would be since the ultimate beneficiaries are the laborers  and it is paid in advance to the concerned Department and recovered by the contractor from his contract laborers, well it is a pure reimbursement attracting agency principle and hence no GST at this end.

But what the contractor collects from the Contractee Factory will be taxable comprehensively, I must think, because, the employees are not on the rolls of the company but the contractor!

When contractor supplies Labor for a lump sum amount, out of which, he pays ESI & PF, will the consideration paid by the service recipient to a contractor will still ESI/PF contributions under Sec 15(1) valuation under the GST Act?

 Strictly speaking the answer to the above question would be going by Sec 15 and the intent and purpose behind it, even all taxes, duties, cesses, fees and all charges are to be included why to speak of the ESI and EPF amounts.

The only other option lies in challenging the validity of the provisions of Sec 15(1) before the Court these elements are not includible and that could be a only futile effort.

As far the agency principle, it works between the employees and the contractor. But not between the contractor and the Contractee Factory that outsources labor through the contractor.

It will not have any significance in relation to the transaction, harped upon. Here the elements of EPF, ESI are not separate obligations of the company towards the contractor, as it is with regard to the contractor in relation to his contract laborers.

The nexus is missing, hence squarely outside the ambit of reimbursement or any reduction otherwise provided under Sec 15(1).

Whether it can qualify for any abatement from the scope of value of Sec 15(1) of the Act or in any other way exempted per se considering the nature of deduction namely ESI/PF?

The answer would be an emphatic NO.

It is true that a manpower service provider should pay EPF & ESI at his own, as it is his liability to pay GST. But does it not depend on agreement of contract?

Showing separately is one’s own choice. But it will get grossed up if paid outside the Invoice separately and taxed in the hands of the contractor.

The relationship between the Factory and the contractor is Principal to Principal and not Employer to contractor. This must be understood clearly.

Eventually, it’s allowed as a reimbursement, when paid by the contractor to ESI/PF on behalf of the Laborer on an Agent-Principal relationship. What’s the problem?

The Act gives provision for it aptly at the right end point of taxation. It has to be understood in the right perspective.

Look at it from the angle of revenue neutrality. The contractor gets the tax from the company and pays it to the Government. He gets his ITC. What’s his problem, there?

Unless company remits it in its account to the ESI /PF, they have no right to speak about it. Nor the contractor has any right to speak about it, when he gets his reimbursement from the Laborer.

Please understand my response correctly. The service recipient having the obligation here of ESI/PF is the laborer. He can reimburse it to the contractor, who need not pay tax on the reimbursement claimed.  Nor the laborer pays tax on it.

Where’s is the company coming in the picture to pay less of ESI/PF of the labor contract bill, raised on it by the contractor, is the question

The Author’s response to the above is in that that if either the contractor or the company makes a deduction of it from the value, it will not help and they would be called upon to pay/bear the tax consequently, by getting it grossed up in value under escapement and it’s actionable as suppression of value with intention to evade tax to that extent. It is even punishable with penalty and interest in addition to Tax.

EPF & ESI both are for the welfare of labor. Why tax it?

Sec 15(1) doesn’t speak about this. The contractor pays in the name of the laborer and collects it. But when he collects it as a consideration from the Contractee Factory who is not the Pricipal employer having any obligation for such remittances, then there is question of any GST relief at that stage of the transaction, though down the supply chain, it gets appropriate relief.

Continuous supply of labor will be there in many cases, even in factories also. We can’t rule it out. Can we?

As per Sec 2(33) “continuous supply of services” means a supply of services which is provided, or agreed to be provided, continuously or on recurrent basis, under a contract, for a period exceeding three months with periodic payment obligations and includes supply of such services as the Government may, subject to such conditions, as it may, by notification, specify;

One may need to have a view critically look at how the manpower is supplied by the contractors, who are engaged in supplying unskilled, semi-skilled and skilled manpower as required.

They raise the invoice on monthly basis based on the type and number of people provided at the agreed rate month to month.

It is difficult to visualize the concept of continuous supply of service by a contractor in case of this kind of labor contract, would be the answer.

The next Contention

Rule 30 of EPF Scheme mandates, the payment of EPF by the Principle Employer i.e., where the Laborers are actually working.

Section 40 in the Employees’ State Insurance Act, 1948

40.Principal employer to pay contribution in the first instance.—

(1) The principal employer shall pay in respect of every employee, whether directly employed by him or by or through an immediate employer, both the employer’s contribution and the employee’s contribution. The same the meaning of the Principal employer is extended under ESI Act also.

If these are the basis of the contention, it is seen that there is a misconception as to who is the Principal employer is in the given situation which is the labour contractor and not the Contractee Factory. This is substantiated below by a catena of decisions of various forums including the Apex Court.

Even if reimbursement is made, ESI/PF payment responsibility can’t be moved from the Principal Employer who is  the contractor to the Contractee Factory. This will not be allowed and hence no GST relief of any kind is possible.

Going by the plain meaning of the statutory provisions of Sec 15 of the GST Act and the underlying principle governing it, one may not be able to claim any deductions of them from value and tax either as a matter of right or otherwise, in the transaction o a Labor contract.

A sample ESI/PF Agreement

The firm will be required to sign a contract with Contractee Factory   on a proper Rs. 500/- Non-judicial stamp paper, in a prescribed format before start of work. The cost towards agreement shall be borne by the firm.

Responsibilities of the firm: –

i. General Responsibilities: – i. The firm shall follow all the statutory compliances as mentioned in the Annexure-I and all the prevailing Industrial / Labor laws/ Govt. laws, as amended from time to time.

ii. The firm shall pay all taxes, fees, license charges which may be him or otherwise as deemed fit.

iii. The firm shall ensure that no damage is caused to any person/any existing work/property of Contractee Factory/other parties working inside the factory. If any such damage is caused, it shall be the responsibility of the firm to make good the losses and compensate the affected parties at his own cost.

iv. The firm shall fully indemnify Contractee Factory/its customer against all claims of whatever nature arising during the course of execution of this contract due to acts of the firm/their personnel.

1. Gate Pass for entry into Contractee Factory would be required for all the persons deployed by the firm. The firm shall be arranging the passes and working permission beyond normal working hours on their own. Contractee Factory Engineer shall provide necessary help and guidance for the same.

2. Firm shall maintain a Wages register showing the following details clearly, for each month, exclusively contract / area wise: –

3. Measure of work (or attendance) for which worker is entitled for wages.

4. Wages paid,

5. PF and ESI deduction from each worker,

6. PF and ESI contribution by firm,

7. Whether monthly wages slip received,

8. Signature of worker. One copy of wages record shall be furnished every month, for inspection purpose of various labour authorities.

Firm shall preserve all such wages records up to as specified by Labour laws and at least up to the security deposit clearance.

vii. Firm shall furnish the following certificates duly applicable for the working year, whenever desired by Contractee Factory

1. Annual returns & inspection certificates of PF and ESI.

2. Monthly challans of PF and ESI.

3. MP Welfare fund receipt.

4. Annual statement for availed/paid leaves,

5. Bonus paid (Form-C & D)

6. The firm shall ensure that the employees deployed by them restrict their movement in the area earmarked.

7. Technical responsibilities:

8. Firm shall perform all activities of the enlisted work category, or activities as notified in the Tender, as per directives of Contractee Factory shop engineer.

9. Only qualified workers with required experience in the relevant work category shall be deployed to execute the work.

iii. The work shall be done under the full time and complete administrative & technical supervision by graduate engineer / experienced diploma holder / Group leaders appointed by the firm.

1. All materials required to perform above activities and other shop equipment/fixtures/ tools / crane facility will be provided at free of cost by Contractee Factory

2. Working time can be any time during Ist/ IInd shifts as required by Contractee Factory including Sundays & Holidays. Normal working hours in the plant is 8 hours.

3. The firm shall complete the allotted work, meeting all norms & safety parameters of Contractee Factory and up to the satisfaction of shop executive. vii. Measurement unit of assigned work shall be generally per technology hours or per weight unit, per MVA, per job, per Crane hours others etc. which shall be notified during bidding invitation.

4. Rights of Contractee Factory :

Contractee Factory    reserves to itself, the following rights without entitling the Contractor to any compensation: – Resorting to any, some, all of the actions like Contract termination, recovering the dues/ losses from the Security Deposit and the contract amount, forfeiting the Security Deposit, getting the work done through other agencies at the cost of the contractor, cancellation of registration, banning the business with Contractee Factory   etc., in any event of the followings:

Contractor’s repeated poor performance, withdrawal from or abandonment of the work, except in force majeure conditions.

Contractee Factory

Serious lapse in performance, Persistence disregard of the instructions.

Insolvency of the contractor.

Assignment, transfer, subletting of the contract work without Contractee Factory’s written permission. v. Non-fulfillment of any contractual obligations or obligations under the law.

STATUTORY INSTRUCTIONS TO CONTRACTOR (To be ensured by contracting dept.)

STATUTORY REGISTRATIONS AND CLEARANCES Contractor shall commence the work only after obtaining:

1. Labour Licence

2. Provident fund code no.

ESI code no

1. Registration no.

2. Notice of commencement in Form 6-A & Maintain Register of workers Form 13.

3. CONTRACTOR SHALL ENSURE FOLLOWING WHILE EXECUTING CONTRACT

4. Employment card as per rule no 76 of contract labor (Regulation & Abolition) MP rules,1973

5. Appointment letter to his employees. iii. Annual leave with wages including EL, CL, National Holiday & Festival holiday.

6. Leave record register.

7. Shall engage only adult workers who have attained the age of 18.

8. Work to be done on second/third shift, overtime, Sundays or on other declared holidays with written permission.

9. Obtain insurance cover for his employees/ equipment, tools etc. & third party insurance coverage at his own cost.

10. Remit Provident fund contributions in prescribed 3A & 6A forms

11. ESI contributions in Form 6.

12. Submit challans of PF & ESI contributions every month.

13. Provide Personal protective equipment’s for his employees.

14. Distribute wage slip each month to his employees.

15. Ensure payment as per statutory norms in presence of concerned dept. representative. k. Provide Uniform to labors different from Contractee Factory employees.

16. Submit employee and employer contribution as per Shram Kalyan Nidhi Adhiniyam1982.

17. ESSENTIAL INGREDIENTS OF AN AGREEMENT BETWEEN PRINCIPAL EMPLOYER AND THE CONTRACTOR

18. That the agreement should be drafted and executed on non-judicial stamp paper.

19. That the agreement must disclose the names, addresses of the contractor and the principal employer.

That the agreement should contain the rights and obligations of both the parties.

1. That the agreement must disclose the place of work, time of working, rate of compensation (towards consideration) and consequences arising out of breach contract and procedure of termination by either of the parties to the agreement.

2. That the agreement must carry out the objectives of statutory provisions and judicial pronouncements. That the agreement must disclose the scope of work, period of validity, compensation, security deposit and terms of payment of bills.

3. That the agreement should be between the contractor and the principal employer and should be witnesses by two witnesses.

A detailed discussion with citations to explain the liability of tax and who is the Principal Employer, Contractor and Employee and their respective roles and legal responsibilities and obligations in a Labor contract

The Scheme of the Contract Labor (Regulation & Abolition) Act stipulates that the principal employer will not be supervising the workers of the contractor otherwise the contract labor system will be rendered as sham, ruse and camouflage [Steel Authority of India Ltd. vs National Union Water Front Workers, 2001 LLR 961 (SC)].

In Pardeep Kumar vs. Presiding Officer and another, 2015 LLR 726, the Punjab and Haryana High Court has held that employer-employee relationship, in respect of principal employer, would not exist if the contractor, engaged in supply of man-power, is having a valid licence under the Contract Labour (Regulation and Abolition) Act, 1970, records of payment of wages and attendance show payments made by the contractor, EPF Employee Code number allotted to the workman is through the firm of the Contractor.

In Group 4 Securitas Guarding Ltd. & Another vs. Employees Provident Fund Appellate Tribunal & Ors., 2012 LLR 22 the Delhi High Court has held that where the contractor, being employer providing services of manpower, is having control over the personnel being supplied by him to the establishments by way of issuance of appointment letters, making payment of wages and other allowances, taking disciplinary actions, affecting their placement, transfer, and termination of services, the relationship between such a contractor and the establishment where the manpower is supplied by him would be of principal to principal and not that of employer-contractor.

In the Madurai District Central Co-operative Bank Ltd. rep. by its Special Officer vs. Employees Provident Fund Organization, 2012 LLR 702, the Madras High Court has held that when a separate code number was allotted, the employees of the contractor, by no stretch of imagination can be treated to be employees of the principal employer. After hearing the arguments on behalf of the parties (Employees Provident Fund Organization as respondent), the Court held as under:

With respect to the contractors, who are registered with the Provident Fund Department, having the independent code number, they are to be treated as independent employer. The petitioner, therefore, cannot be treated to be ‘principal employer for the purposes of those contractors.

In Brakes India Ltd. (Brakes Division), Sholinghur-631 102, rep. by its Vice-President (Pers. & HRD) vs. Employees Provident Fund Organization, Vellore rep. by its Regional Provident Funds Organization, 2015 LLR 635, the Madras High Court buttressed the same point in holding that the Employees Provident Fund Authority is not entitled to recover either Provident Fund contribution or damages from the principal employer in respect of employees engaged through contractors, registered with the PF Department, having independent code number.

The Hon’ble Court concluded that the Contractor was allotted with EPF allotment number vide No.TN/VLR/38789/SDC.2013 in the year 2003 itself. As per the ratio laid down in the judgment of this Court, the Contractor viz., Mr. A. Govindaraj should be treated as an independent employer.

In Calcutta Constructions Company vs. Regional Provident Fund Commissioner and ors., 2015 LLR 1023 the Punjab & Haryana High Court has held that so long so the code number is not allotted to the contractor it is the liability of the establishment to pay the provident fund on account of the employees employed by the contractor and thus, in essence, it is the liability of the establishment to pay and not that of the contractor to pay contribution.

Reference has also been made to Para 30 of the Scheme inter alia stating that the pith and substance of the language of Para 30 ex facie reveal that it is the employer who has to make the contribution at the first instance.

This Court also had an occasion to deal with this situation in the judgment in Regional Provident Fund Commissioner vs. M/s. Ropar Thermal Plant (GGSTP) PSEBs, 2013 LLR 243 where the contractor had not been given the Code number. It is till such time till the code number was not allotted it is the establishment who shall pay.

In all the above cases before the Supreme Court and High Courts, the Regional Provident Fund Commissioners have been parties to the appeal or the writ petitions and as such the lame excuse of ignorance of the judgments will not be accepted by even a lay man.

General Instructions of ESI Circular issued by its Head Quarters at New Delhi dated 10.02.2020 by the Joint Director General.

The EPF & Misc. Provisions Act, 1952 allows the covered establishments to generate multiple Challans for submission of contributions in respect of contributing members.

The Indian Contract Act, 1872 covers all the contracts entered into between various parties and violation of any mandatory terms and conditions of the Contract would confer the right on the parties to terminate the contract in such an eventuality unless the violation is rectified on being notified.

Keeping these provision in sight, all the Offices of the Corporation should ensure that the following instructions are scrupulously followed in respect of the existing and future contracts entered into by the ESIC Offices.

Keeping these provision in sight, the Offices of the Corporation should ensure that the following instructions are scrupulously followed in respect of the existing and future contracts entered into by the ESIC Offices.

a) A Nodal Officer, preferably the General Branch officer, be nominated to ensure timely wage payments and statutory compliance by the outsourcing contractor.

b) The Offices that have outsourced work through outsourcing contractor should register themselves with the jurisdictional Labour Commissioner’s Office under the Contract Labour (Abolition and Regulations) Act, 1970 and ensure compliance with the provisions of the said Act relating to engagement of persons through contractors and their wage payments.

c) Every outsourcing contractor engaged by the ESIC Offices should be directed to obtain location specific Sub-Code Number for the office and the user id and password for the ESI Corporation locations should be shared with the nominated officer of the Corporation who would monitor the compliance under the said Sub-Code each month within the statutory limit.

d) Copy of the location specific EPF Challan should be submitted with the time limit specified.

e) The wage payments to the outsourced workers within the time limit specified under the relevant Act should be ensured by the Nodal Officer.

f) The Head of the Office should ensure timely processing of bills and payments to the Outsourcing Contractors after ensuring statutory compliances. It will be the sole responsibility of the HHeHead of the Office that the statutory compliances are not delayed.

In case of default by the Contractor and / or complaints from the outsourced workers of the nature mentioned in para 2 the following procedure should be adopted by the Offices without fail.

a) Individual declaration in the proforma attached as Annexure – I should be obtained from the aggrieved outsourced workers which would trigger the action against the contractor.

b) Show Cause Notice in the format at Annexure II should be issued to the outsourcing Contractor on receipt of the Declaration at Annexure – I

with 7 days’ time to respond to the notice.

c) In case the outsourcing Contractor does not take prompt remedial action and show compliance within the time limit of 7 days and / or fail to show legally valid cause, prompt action for termination of the contract should be taken. Model termination order is given in Annexure – III.Further, in addition to taking the above actions, the Heads of Offices should take the following legally mandated action after issuing the Show Cause Notice to the outsourcing Contractor specified at (iii) above.

a) It is the duty of the Principal Employer under Section 24(1) of the Contract Laour (Abolition & Regulations) Act, 1970 to pay the wages on behalf of the Contractor to the workers engaged by him in case of any default by the contractor in this regard. Hence wage payments be made directly to the outsourced workers based on the biometric attendance records maintained in the office at the contracted rates after 7 days of the receipt of the notice by the contractor.

b) ESI and PF contributions at the statutory rates should be deducted from te wages of the workers engaged by the outsourcing contractor at the time of such wage payments.

c) The deducted EPF contribution along with the Employer contribution which is being reimbursed by the Corporation should be reemitted to the jurisdictional EPFO Office by way of Demand Drat and covering letter showing the names of the contributing employees, their UAN Numbers, wage particulras and contribution details.

d) The ESI Contribution should be remitted along with Employer’s share which is being reimbursed by the office after generating challan using the location specific sub-code to be generated for the persons deployed at the office concerned.

e) In case of persistent default by the Contractor, the jurisdictional Labour Commissioner’s Office should be approached for action against the contractor for violation of the licence conditions under the Contract Labour (Abolition & Regulations) Act, 1970.

These Organization need to be reoriented, overhauled. There should not be any hesitation in doing it with an iron hand.

Author’s End Note

From the detailed discussion above, it is amply clear that under both the ESI/PF Laws, the Principal Employer is the contractor and not the Contractee Factory and therefore the obligation and legal responsibility to remit the ESI/PF to the concerned Department is on the Contractor.

The Contractor alone will be liable to GST on the consideration received from the Contractee Factory without allowance of any abatement of ESI/PF elements to the latter or the Pure Agency Principle is applicable to the said transaction between them.

K.Srinivasan(IRS)

Januar, 25, 2021.

Author Bio

Qualification: LL.B / Advocate
Company: RANK Associates,Chennai
Location: CHENNAI, Tamil Nadu, IN
Member Since: 15 Dec 2020 | Total Posts: 6
Author was formerly with the IRS. He writes regularly on Indirect Tax Laws, Macro Economics and General Laws. He is a senior Guest Faculty at NACEN, Chennai and a CBIC Master Trainer of GST. He has trained a large number officers of the Center and State Tax Departments.He has a long association with View Full Profile

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7 Comments

  1. K. Srinivasan says:

    This is in continuation of my first comment on the indirect tax angle wrt ESI/PF contribution.The following comment is a matching part of it on the direct tax /IT angle.
    The abatement if provided for ESI/PF by a suitable amendment in the GST Act in its Para 1 of Schedule III, it will resonate well with Sec 43(B) of the IT Act also, as a deduction from income of the assessee.
    K. Srinivasan(IRS)
    Author

  2. K. Srinivasan says:

    The short point here is if contractor recives some consideration from the factory, he has to pay GST on such consideration, regardless of the ESI/PF part claimed in the Main Invoice or subsidiary Invoice. It doesn’t qualify for a deduction from value for computation of GST liability in his hands. There is a long pending dispute before the SC as to who is the Principal Employer. There are judgements for and against this stand. But matter has not attained finality, yet. Be that as it may.
    The fact now is the contractor, when deducts from the wages of the laborers, ESI/PF which is independent of his outsourcing contract with the Factory, neither he nor the labourer will be required to pay any tax on these ESI/PF contributions made by the contractor, for the laborer’s share in advance and deducts it subsequently from his wages. This is an independent act of the contractor, over which I have no opinion to offer. Most Labour/ESI/PF Laws, want to play it safe by their overarching interpretations of the concept of Principal Employer, by shifting it from the contractor to the Factory, without any underlying support in the form of registration numbers etc with the concerned ES/PF departments, to credit employer contributions to the rightful account, which is as per the ESI/PF Acts, is the contractor and not the Factory, as far my limited understanding goes.
    So, I am not against the Labour Laws and other allied acts and rules being changed to rope in the Factory into the mischief of the Principal Employer. But as things stand, until the above position is altered, the onus of payment appears to rest with the contractor. For any reason if it changes, then the ESI/PF may be remitted by the Factory itself directly, by the often defaulting contractors, netting it off the outsourcing wage bill paid to the contractors.
    If this position is changed, then GST Law needs to undergo a change to treat it as an abatement from the consideration paid by the factory to the contractor, by a suitable amendment in the Schedule III Para 1, to treat is as an amount paid as part of CTC.
    K. Shrinivasan (IRS)
    Author

  3. A.K.SHEKAR says:

    The article inherently contradicts with Contract of Labour Act and Rules relating to PF and ESI and many other acts and rules.
    While all above codes may soon be replaced by new labor codes the clear distinction between Principal Employer and Contractor has been grossly misinterpreted by the author.
    While the Author has quoted High Court rulings which call Contractor as Independent contractor
    he has not quoted at least dozen Supreme Court Judgments which squarely makes the Employer responsible for ESI PF and Minimum Wages and timely wages for both directly employed labour and Indirectly employed Labour (through Contractor) giving false sense of security to Principal Employers .
    Keep all laws apart. There is one question which remains answered. Is it ethical and morally right to protect a Employer who is on the wrong side of law by executing an agreement and twisting the arms of the contractor and implicating the contractor without passing of the benefit meant for the employee to the contractor. Any law that proclaims such immoral value should be struck down.

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