Employment services reform debate:Why GST cut proposal is gaining attention in India’s labour market

India’s ongoing shift towards economic formalisation has created a parallel debate on how taxation policies can support job creation and structured employment. A recent policy discussion led by the Indian Staffing Federation highlights the role of employment services taxation in shaping this transition. GST rate debated for staffing services The country has seen steady progress in formalisation through initiatives such as GST, UPI, Jan Dhan Yojana, and the digitisation of EPFO records. These measures have increased the formal sector’s share in GDP from about 30% to 56% over the last few decades. However, the labour market structure remains heavily informal, with nearly 82% of India’s workforce still outside formal systems. At the centre of the debate is the 18% GST currently applied to manpower supply and staffing services. Industry stakeholders argue that this rate is disproportionately high for a sector that facilitates formal employment, especially when compared to luxury goods that fall under similar taxation brackets. Informal workforce remains dominant across India According to industry estimates, staffing services currently support around 73 lakh temporary workers with an average monthly salary of ₹18,000, generating nearly ₹33,000 crore in GST. However, a large portion of this is offset through input tax credits, reducing actual net revenue for the government. At the same time, most informal labour transactions remain outside the tax net entirely, contributing neither GST revenue nor social security coverage. Industry cites revenue loss paradox data Proponents of reform argue that reducing GST on manpower services from 18% to 5% could initially lower revenue collections. However, they claim that expanded formalisation could eventually increase total GST receipts significantly over time. The Indian Staffing Federation projects that long-term collections could rise to as high as ₹1–1.5 lakh crore if formal employment expands substantially. The industry also points to broader employment trends. Flexi staffing companies reported 15.3% growth in FY24 and facilitated formal jobs for nearly 19 lakh workers. However, rising compliance and tax costs, they warn, may slow hiring momentum and push workers back into informal arrangements. Staffing sector highlights employment growth impact A key argument in favour of lowering GST is its link to social security expansion. Every formal job created through staffing firms contributes to EPFO registration, ESIC coverage, and wage documentation. In FY25, EPFO added a record 139.78 lakh members, with a majority under the age of 29, indicating strong youth participation in formal employment channels. India’s long-term employment challenge remains significant, with estimates suggesting the need to generate nearly 78.5 lakh non-agricultural jobs annually by 2030. Industry stakeholders believe employment services could play a critical role in bridging this gap if policy frameworks are aligned to encourage formalisation rather than discourage it. Policy linked to social security expansion The proposal to reduce GST on employment services is therefore being positioned not as a sector-specific relief, but as a broader structural reform aimed at strengthening job creation, expanding social security coverage, and improving long-term fiscal outcomes.