India has quietly built one of the world’s three largest formal flexi-staffing industries. A single tax setting is now holding it back from becoming something far larger. The 56th GST Council, meeting on September 3, 2025, delivered the most sweeping tax reform since 2017. GST 2.0 collapsed the old multi-slab regime into two principal rates, 5 per cent and 18 per cent, and moved more than 200 items down, with 99 per cent of goods in the erstwhile 12 per cent slab shifting to 5 per cent from September 22.
The intent: tax essentials lightly, expand consumption, and widen the formal economy. Employment services were left untouched at 18 per cent.
Charged on entire invoice
That is the anomaly. For every ₹100 a company now spends on goods taxed at 5 per cent, it pays just ₹5 in tax. Spend the same ₹100 on formal staffing and the levy is ₹18, a 3.6-times gap on labour, the one input no business can do without. Because GST on staffing is charged on the entire invoice, most of which is the worker’s own wage passed through, the burden lands hardest on the sectors we most want to formalise: MSMEs, consumer-facing industries, and GST-exempt services such as healthcare and education that cannot claim input tax credit. The consequences are measurable. Indian Staffing Federation estimates the 18 per cent rate drains ₹20,000-30,000 crore from business liquidity every year and is on course to reduce formal temporary hiring by 10-15 per cent in affected sectors this fiscal, nudging workers back towards informal and gig arrangements that carry no provident fund, no insurance, and no wage protection. Taxing formal employment at a premium, while goods enjoy relief, is a policy working against itself.
Consider what this industry already delivers. Our member companies alone employed 1.83 million formal flexi workers by June 2025, and the organised flexi sector now supports roughly 7.2 million people, about 1.3 per cent of India’s workforce, among the world’s top three flexi-staffing markets. In the last financial year, the sector paid an estimated ₹1.47 lakh crore in wages and ₹52,800 crore towards social security and GST.
Contract employment
Logistics, BFSI and manufacturing together account for around 38 per cent of formal contract employment, with twelve core sectors making up 80 per cent of demand.
Nearly a quarter of these workers are women, and most are young, first-time entrants receiving their very first formal job, complete with EPF, ESI and a bank-credited salary. This is formalisation delivered by the market: jobs, not doles.
The headroom is the real story. India’s flexi penetration, at 1.3 per cent, still trails the US (1.8 per cent) and Europe (1.6 per cent), and it sits against an informal economy that accounts where some 400 million people outside the formal social-security net. Converting even a modest slice of that into organised, contributory employment is, on any reasonable arithmetic, a 20-million-job opportunity. ISF projects the market to compound at over 17 per cent a year towards ₹2.58 lakh crore by FY27, and independent analysis expects the sector to create several million additional livelihoods by 2030. The demand is plainly there; the binding constraint is fiscal, not structural.
Correcting it is not a concession; it is sound revenue policy. Moving employment services to the 5 per cent merit slab would, by our estimate, release up to ₹50,000 crore in cash flows for reinvestment and fresh hiring.
A lower rate applied to a rapidly formalising base does not shrink the tax net; it widens it, through more compliant payroll, more EPF and ESI contributions, and more GST-registered employment.
This is precisely the logic the government itself applied to goods under GST 2.0. Employment deserves the same treatment.
Employment is the most essential input in any economy. Tax it accordingly. Move employment services to 5 per cent, and India can convert a two-million success story into a 20-million one: formalising work, extending social security to millions, and doing it the durable way, through jobs.
The writer is Executive Director, Indian Staffing Federation (ISF)
Source from: https://www.thehindubusinessline.com/opinion/gst-on-staffing-needs-to-be-reduced/article71469456.ece
