Understanding Retirement Benefits and GST for Full-Time Contractual Workers: What Are the Rules?

If an organization is engaging for 3-4 years on a full-time exclusive contract basis and provides monthly remuneration, marks office attendance, accords leaves, conducts appraisals, offers life insurance, accident insurance, etc., what are the common policies to be applied with respect to statutory or related retirement benefits applicable? Are they entitled to PF, etc.? Also, if GST is applicable, why or why not? I'm inquiring about contractual engagements in general, ranging from minimum wages to even those above 20L per annum.

They are not service providers or consultants but employees on fixed-term contracts. The remuneration payable to them is called salary, and it will not attract GST.

If they were members of EPF in their earlier organization, they should be given EPF even if their salary is Rs 20 lakhs per month. If their service extends beyond 5 years, gratuity should also be paid to them upon leaving your organization.

Thank you for the insight. However, the Finance department insists on applying GST rules to engagees with contracts exceeding 20 lakhs. They have been booking their TDS under section 194J and issuing Form 16(a) accordingly. How can this be effectively argued so that the management understands the situation?

They are employees, and their remuneration should be booked under section 192 and not under 194. You may please refer to the attached judgment, which is self-explanatory.

Thank you for the document. This is really helpful. I have passed it on to my seniors, hoping there will be no more counterarguments. I will keep this thread open to update further.

If the person in question is on contract and your company is deducting TDS under Section 194C, and the employee is not objecting to it, meaning they are accepting they are contract employees, then their service will come under GST, and they will need to register and pay GST on their invoices.

It also means that accounts cannot pay them without a formal invoice. They are right in insisting on GST, as it will strengthen their position in case there is an investigation by the income tax or GST department.

The employer knowingly offers such terms, and the employee unknowingly accepts them. That does not mean that whatever is agreed upon is maintainable in law. If there is anything against the law, the contract will become void. In this case, the contract is void since there exists an employee-employer relationship. The employer is trying to deny the benefits under various Labour Acts, including gratuity. That should not be allowed.

Thank you for your comment, @Saswata. Note #6 - this is exactly the current practice from a GST perspective; however, from a service rule perspective, it's highly debatable.
@Madhu.T.K - What you wrote on Note #7 is exactly the situation here, and as an HR Manager, I would like to stand with the contractual engagee.

Now, having acknowledged both your views, I have a new situation (as of yesterday). While my earlier issue on enforcing GST on engagees by the finance and accounts division was put to rest thanks to the document (Supreme Court orders) shared in Note #4, this new situation is as follows:

New Situation with GST Registration

Owing to past practices, some mid-level and junior contractual engagees (innocently/intentionally) opted for the GST registration number and started raising invoices. However, we have now received a request from one person (and more may follow later) that they wish to "opt out" of the GST category and continue as a full-time contractual engagee that gets paid a monthly consolidated remuneration fee. This person wants to resume filing tax under Section 192. There are many engagees who are still filing personal income tax under 192 while this organization is submitting under 194J and issuing Form 16A.

Please help and advise a way forward on the above matter. If you need further information from me, please do ask and comment accordingly.

Thank you - Saudamini

If the engagement of a person's services is under a Contract of Service, he becomes an employee, and as such, all the terms and conditions of his services are regulated by the applicable labor laws. Income Tax has to be levied subject to the exemptions, if any.

On the contrary, if a person's services are engaged under a contract for service, he becomes an independent contractor subject to the provisions of the GST Act.

As Mr. Madhu has observed, if either a contract of service or a contract for service includes any provision for deduction under the GST Act by inadvertence, it will not hold good.

Contractual Employment and Legal Implications

It is not clear how many employees are engaged on a contractual basis, starting from minimum wage to 20 L. The employees are enjoying facilities like regular employees—leave, attendance, appraisals, and insurance coverage—comparable to any permanent employee of an organization.

If they are contracted for service and the number of employees engaged is reasonably high with the objective to bypass labor laws—PF, ESIC, Gratuity, Bonus, etc.—it is not legally right as they are enjoying other facilities like permanent employees (contract of service). I have noticed organizations engaging all retired employees in a similar way for 3/4 years after retirement. In a dispute at the Labor Directorate, the DLC categorically stated not to continue the system as a contract for service; rather, it should be a contract of service. They are basically employees, and no GST will be applicable. For one or two cases, it may be considered a contract for service as a consultant, advisor, etc., and the other service conditions should not be like those of permanent employees.

Regards, S K Bandyopadhyay (WB, Howrah) CEO-USD HR Solutions [Phone Number Removed For Privacy-Reasons] [Email Removed For Privacy Reasons] USD HR Solutions – To strive towards excellence with effort and integrity

@S K Bandyopadhyay - Thank you for your comments and questions in Note#10.

Employee Engagement on a Contractual Basis
Q: It is not clear how many employees are engaged on a contractual basis, starting from the minimum wage to 20 L.
A: At present, around 20 out of approximately 700 employees are above 20 LPA.

Employee Facilities
Q: Do employees enjoy facilities like regular employees - leave, attendance, appraisals, and insurance coverage, as good as any permanent employee of any organization?
A: Yes, all of the above.

I hope that answers your questions, and thank you for your inputs. I am incorporating them into my response paper to the management. There is still a lot of back and forth going on this subject between HR and Finance/Budget & Accounts teams.