GST on Labour Charges HSN Code 9985 Rate and Billing Guide

You’ve just received a labour bill from a contractor, or maybe you’re the one raising it. Either way, the same three questions pop up almost every time: Do you bill it under HSN or SAC? Is the GST rate 18%, or does it fall under some exemption you’ve heard about but never actually checked? Can the tax paid on it be claimed back as an ITC?

If you’ve ever paused mid-invoice trying to figure this out, you’re not alone. Most of the confusion around labour billing in India doesn’t come from the GST law being unclear — it comes from people mixing up codes meant for goods with codes meant for services, and then guessing the rate instead of confirming it. A lot of these slip-ups happen simply because invoices are still being made by hand or patched together in a spreadsheet, where there’s nobody double-checking the code before it goes out the door.

This guide walks through exactly how labour charges are taxed under GST, where the SAC 9985 classification fits in, when the rate isn’t 18%, and how to bill it so it holds up if anyone ever asks questions later.

HSN vs SAC 

Here’s the part that trips up almost everyone: HSN codes are for goods. Services use a different system entirely, called SAC, Service Accounting Code. So when someone searches for “HSN code for labour charges,” what they actually need is a SAC code, because labour is a service, not a product you can put in a box.

The reason “HSN Code 9985” still gets used so often, even by accountants, is just habit. HSN was the more familiar term before GST rolled both systems into one broader framework, and the old terminology sticks around. You’ll see both used interchangeably online, but technically, if you’re billing for manpower, staffing, or any kind of labour supply, you’re working with SAC 9985 — not an HSN code.

Should you crave a deeper understanding of how GST works and what the rationale is behind separating goods from services, this blog post titled Goods and Services Tax (GST) will surely help you figure this out.

Takeaway point: Being a type of service, Labour belongs to SAC 9985 instead of HSN.

What Does SAC 9985 Actually Cover?

SAC 9985 is a fairly broad bucket. It’s defined officially as “Support Services,” and in practice, it means all things that ensure a hassle-free performance for a business, other than providing the main product or service, which is the essence of the business. To put it simply, this represents back-office work that is engaged in processes. Some everyday examples that fall here:

• Manpower and staffing agencies supply workers on contract
• Security guards and private security agencies
• Cleaning and housekeeping crews
• Packaging and labelling services for someone else’s goods
• Event support staff and coordination teams

Within 9985, some sub-codes get more specific. 998513 is used for contract staffing and temporary labour supply — this is the one most manpower agencies will end up using. 998519 covers “other employment and labour supply services,” which is where a lot of miscellaneous labour arrangements land if they don’t fit neatly into a named category.

The sub-code you pick matters more than people realise. Getting it wrong doesn’t usually change the tax rate, but it can raise flags during a departmental review simply because the description on the invoice doesn’t match the code billed.

The GST Rate — The Number Everyone’s Actually Searching For

Here’s the answer up front: most services under SAC 9985 attract 18% GST.

This applies to the bulk of labour and staffing arrangements — manpower supply, contract staffing, security services, cleaning, packaging labour, and event support. If you’re a business hiring contract labour or an agency supplying it, 18% is the rate you should default to unless a specific exemption applies.

The 18% is charged on the total value of the service. That includes the labour charges themselves, plus any commission or margin the agency adds, plus reimbursements — unless those reimbursements are structured as a pure agent expense, in which case different rules apply.

• Let’s make an illustrative example.
• If a time of working on renovation change is 50,000, and the taxable value is 50,000 gst at 18% would mean that the contractor should pay 9,000 rupees as indirect tax in accordance with the definition given above. 
• Total invoice value: ₹59,000

That ₹9,000 becomes claimable as ITC for the business paying it, provided the labour was used for a taxable business purpose.

It’s also worth knowing that these rates were revised as part of the notification effective September 22, 2025, so if you’re working off an older invoice template or a rate card from before that date, it’s worth double-checking it against the current notification rather than assuming nothing’s changed.

When It’s Not 18% — The Exceptions People Miss

Most billing errors occur at this stage, where people either make an incorrect assumption on things and charge items at 18 percent, or hear “labour is sometimes exempt” and therefore skip GST for something that was never exempt. 

Under the genuine exempt category, we have to consider: 

• Pure labour contracts for individual residential house construction under the notified government housing schemes, such as PMAY
• Warehousing of agricultural produce, along with certain cleaning and fumigation services tied specifically to food or agricultural products
• Certain services provided by tour operators purely outside India, or to foreign tourists

Reduced-rate categories (5%) exist too, but come with a catch: most of them carry restricted or no ITC eligibility. This includes housekeeping services booked through certain platforms, some long-term staffing arrangements, and specific tour operator services.

Government infrastructure work has its own nuance. Labour on public infrastructure projects can attract a 12% rate, while the same kind of work on commercial or government office buildings typically stays at 18%.

The safest habit here is simple: don’t assume anything is exempt just because it sounds like it should be. Always check the current notification before leaving GST off an invoice; reversing a wrongly-skipped tax later is a lot more painful than charging it correctly the first time.

Labour Plus Materials Is a Different Story

If a contractor supplies pure labour, just people doing work, no materials involved, that’s SAC 9985.

But the moment materials are bundled in along with the labour, the transaction usually shifts into what’s called a works contract, which falls under a different code (SAC 9954), and it’s still taxed at 18%. The rate doesn’t necessarily change, but the classification does, and getting this wrong is one of the more common errors flagged during GST reviews.

A simple way to remember it:

• Pure labour, no materials supplied → SAC 9985
• Labour + materials as part of one contract → Works contract, SAC 9954

If your invoice includes both a labour line and a materials line under one umbrella contract, it’s worth pausing to confirm which classification actually applies before the bill goes out.

Input Tax Credit — What You Can Actually Claim

ITC is available on labour services billed at 18%, which covers most standard staffing and employment-related services. This is the more straightforward end of the rules.

Where it gets restrictive is at the 5% rate — categories like platform-based housekeeping or certain long-term staffing arrangements often come with no ITC, or only partial ITC, attached. And obviously, anything genuinely exempt has no GST paid on it in the first place, so there’s nothing to claim back.

The practical habit worth building here: before assuming you can claim ITC on a labour invoice, check which rate category it actually falls under. Businesses that keep clean, categorised records rather than lumping every expense together, tend to have a much easier time at return filing and the audit stage. This is honestly one area where decent accounting software earns its keep, since it keeps your ITC-eligible and ITC-blocked expenses separated automatically instead of you sorting through invoices manually months later.

How to Bill It Correctly — A Practical Checklist

If you’re the one raising the invoice, here’s what needs to be on it:

1. Use the correct SAC, not HSN — this is the single most common mistake on labour invoices
2. Pick the right sub-code — 998513 for contract staffing, 998519 for other labour supply, and so on
3. Show the taxable value clearly, separate from the GST amount
4. Break up the tax correctly — CGST + SGST for intra-state billing, IGST for inter-state
5. Mention forward charge or RCM, especially if you’re billing a government department or another registered entity, since the liability to pay tax can shift to the recipient in certain cases

Doing this manually, invoice after invoice, is exactly where errors creep in — a wrong digit in the SAC code, a missed RCM note, a rate applied from memory instead of the current notification. A proper GST billing software removes most of this guesswork by applying the correct code and tax split automatically, rather than leaving it to whoever’s filling out the invoice that day.

If you’re issuing a large volume of labour bills — say you run a staffing agency — a dedicated GST invoicing software also saves a surprising amount of time, since it keeps your rate history, client GSTINs, and past invoices in one place instead of scattered across files.

And if your transaction values are large enough to fall under mandatory e-invoicing thresholds, it’s worth checking whether your billing needs to route through e-invoicing software as well — this is easy to overlook until a notice shows up asking why an IRN wasn’t generated.

And it doesn’t end with the invoice. That same sale needs to show up in your GSTR-1, and from there, GSTR-3B pulls the summary numbers, the SAC code, the rate, and the amount — straight from what you billed. 

Common Mistakes Worth Avoiding

A quick list of the errors that show up again and again on labour invoices:

• Using HSN instead of SAC on a service invoice — always double-check before submitting
• Ignoring ITC restrictions at the 5% rate and claiming credit that isn’t actually available
• Skipping GST on categories that aren’t genuinely exempt, based on assumption rather than the actual notification
• Misclassifying composite supplies — treating a labour-plus-material job as pure labour when it should be a works contract
• Mixing up skilled and unskilled labour SAC codes, even though most labour supply — skilled or not — still falls under the same 998513 unless the nature of the service changes entirely (say, from staffing to consultancy)

Almost all of these come from manual invoicing — someone typing in a code from memory, or copying an old invoice template without checking if the rate or classification has changed since. It’s a big part of why contractors and staffing agencies are gradually shifting toward compliant billing tools instead of spreadsheets.

Why More Contractors Are Moving to Cloud-Based Billing

This isn’t about replacing good judgment with software — it’s about removing the repetitive parts where mistakes tend to happen.

A few practical reasons this shift makes sense for labour and staffing businesses specifically:

• The correct SAC code and GST slab get applied automatically, instead of relying on someone remembering the right rate
• Exemption and notification updates are reflected in the system, so you’re less likely to miss a rate change months after it takes effect
• Invoices, past bills, and ITC records are accessible from anywhere — genuinely useful if you’re managing labour across multiple project sites or field locations
• GSTIN details, RCM applicability, and tax breakups are auto-populated, which cuts down on the back-and-forth disputes that come from mismatched invoices

This is really where cloud based billing software makes a practical difference — everything sits online, accessible from your phone or laptop, and it updates automatically when GST rates or exemption rules change, rather than you finding out three months later that you’ve been billing at the wrong rate.

Conclusion

Getting the classification right on labour charges isn’t complicated once you know where to look — pure labour sits under SAC 9985 at 18% in most cases, with a handful of genuine exemptions and reduced rates for specific categories. The real trouble usually isn’t the law itself; it’s manual invoicing letting small errors slip through.

If you’re raising labour bills regularly, it’s worth setting up a proper system once rather than re-checking rates and codes on every invoice. A cloud-based billing software or dedicated GST invoicing software handles most of this automatically, which frees you up to focus on the actual work instead of the paperwork around it.

This article is for general information only and doesn’t constitute professional tax advice. For anything specific to your business — especially around exemptions or ITC eligibility — it’s best to check with a qualified GST practitioner or chartered accountant.

FAQs

Is GST different for skilled versus unskilled labour? 

Not usually. Both generally fall under the same SAC 998513 unless the nature of the service changes — for instance, if the same skilled worker is engaged as an independent consultant rather than supplied as staff.

What if I’m billing a government client? 

Mention whether the invoice is under forward charge or reverse charge, and use their correct GSTIN. Rates can also differ for public infrastructure work compared to commercial projects, so confirm the project type before applying a rate.

Do I need GST registration as a small labour contractor? 

Yes, if your annual turnover crosses the threshold — generally ₹20 lakh for most states, though this can vary. Below that, registration may not be mandatory, but it’s worth checking your specific state and category.

Can labour-support services exported outside India be zero-rated? 

In specific cases, yes — services genuinely exported and meeting the conditions under GST law can qualify as zero-rated supplies, though the SAC code still needs to be mentioned correctly on the invoice.

Is it possible to use GST invoicing software to get the correct SAC code automatically assigned? 

Yes, good GST invoicing software can link a service to the correct SAC code, thus eliminating a lot of the complexities involved in the assignment of the SAC code to the service provided.