GST for Recruitment Agency – Complete Guide to 18% Tax, 194J TDS & Placement Fees
Clear answers for recruitment agencies, executive search firms, staffing consultants, and placement businesses — is GST 18% on placement fees, why TDS is 194J at 10% (not 194C), does reverse charge apply, can you claim ITC on Naukri and LinkedIn, how to handle free replacement guarantees, and how to invoice overseas placements as export of services.
Quick Summary – GST Rules for Recruitment Agency
- Is GST applicable to recruitment agencies? Yes — all recruitment and placement fees are taxable at 18% GST.
- GST rate: 18% (CGST 9% + SGST 9% or IGST 18%). No concessional rate for recruitment services.
- TDS applicable: Section 194J at 10% — NOT 194C at 2%. Recruitment is a professional service, not labour supply.
- Reverse charge (RCM): NOT applicable to recruitment fees. RCM under notification 29/2019 covers manpower supply and security — not one-time placements.
- GST registration: Mandatory above ₹20 Lakh turnover or when making inter-state placements (which most agencies do from Day 1).
- ITC available: Full ITC on Naukri, LinkedIn Recruiter, ATS software, office rent, marketing, and travel — if registered and charging 18%.
- Placement fee structure: Typically 8.33% of annual CTC (one month's salary) for contingency recruitment. Retained search has milestone billing. All taxed at 18%.
- Overseas placements: Recruitment for foreign employers is export of services — zero-rated with LUT.
- Invoicing: SAC code 998511 (temporary or permanent placement services).
- Place of supply: The corporate client's registered address — not the candidate's location.
Takeaway: Recruitment is fundamentally different from manpower supply under GST. The GST rate is the same (18%), but TDS is 194J at 10% (vs 194C at 2%) and RCM does NOT apply. Getting these distinctions right is the entire compliance game.
1. What is GST for Recruitment Agency? (Overview)
GST for recruitment agencies is the tax framework for businesses that connect candidates to employers — contingency recruitment, executive search, retained search, IT recruitment, and mid-to-senior level placements. The agency earns a placement fee (typically 8.33% of annual CTC or a flat amount) when a candidate is successfully hired.
Recruitment is fundamentally different from manpower supply in three critical ways:
The GST rate is the same at 18% — but TDS and RCM treatment are completely different. This distinction drives cash flow, compliance, and audit risk for the agency.
Takeaway: Recruitment is a professional service, not labour supply. GST is 18%, TDS is 194J at 10%, and RCM does not apply.
2. Is GST Applicable to Recruitment Agencies in India?
Yes — GST applies to all recruitment services at 18%. Whether you do contingency recruitment, executive search, retained search, or IT recruitment — the rate is uniformly 18%.
Types of Recruitment Services and Their GST Rate
| Recruitment Type | GST Rate | TDS Section |
|---|---|---|
| Contingency Recruitment | 18% | 194J at 10% |
| Retained Search (Executive) | 18% | 194J at 10% |
| IT / Tech Recruitment | 18% | 194J at 10% |
| Middle Management Recruitment | 18% | 194J at 10% |
| Senior Leadership Search | 18% | 194J at 10% |
| Overseas Recruitment (Export) | 0% (Zero-rated) | No TDS (foreign client) |
| Placement Consultancy Fees | 18% | 194J at 10% |
Why No Exemption Applies
- Not Education/Healthcare: The GST exemptions are for specific services — not recruitment.
- Not Manpower Supply: Recruitment is a one-time professional service, not ongoing labour deployment — but still fully taxable.
- Not Charitable: Commercial recruitment is taxable regardless of the industry or level.
Takeaway: Every rupee billed as a recruitment fee attracts 18% GST — regardless of level, industry, or contract type.
3. What is the GST Rate for Recruitment Services?
The GST rate for recruitment services is 18%. This applies to contingency fees, retained search fees, milestone payments, and any other recruitment revenue model.
Detailed Rate Breakdown by Service
| Service | SAC Code | GST Rate |
|---|---|---|
| Temporary or Permanent Placement | 998511 | 18% |
| Executive Search | 998511 | 18% |
| HR Consultancy (Advisory) | 9983 | 18% |
| Recruitment Process Outsourcing (RPO) | 998511 | 18% |
| Reference Check / Background Verification | 9985 | 18% |
CGST+SGST vs IGST
- Intra-State Supply: Client's registered office is in the same state as your agency — charge CGST 9% + SGST 9%.
- Inter-State Supply: Client's registered office is in a different state — charge IGST 18%.
- Place of Supply: For recruitment services, place of supply is the client's registered address — not the candidate's location, and not where the interview happens.
Takeaway: 18% is the only rate. The place of supply is the client's registered address — this is the biggest classification mistake agencies make.
4. Do Recruitment Agencies Need GST Registration?
Yes — recruitment agencies need GST registration once annual turnover exceeds ₹20 Lakh (₹10 Lakh for special category states), or if they make inter-state placements. For most agencies, inter-state placements trigger registration from Day 1 because clients are often headquartered in other states.
Registration Requirements by Scenario
| Scenario | GST Registration |
|---|---|
| Only local clients, turnover below ₹20 Lakh | Not required |
| Turnover above ₹20 Lakh (₹10 Lakh special states) | Mandatory |
| Any inter-state placement (client's HQ in another state) | Mandatory |
| B2B contracts with GSTIN-holding corporate clients | Mandatory |
| Overseas placements (export of services) | Mandatory to claim ITC refund |
| Only local placements, below ₹20 Lakh | Not required |
Documents Required for Registration
- PAN card of the entity (proprietorship / company / partnership / LLP)
- Aadhaar of the authorised signatory
- Business address proof (rent agreement + electricity bill)
- Certificate of incorporation / Partnership deed / Trust deed
- Bank account details (cancelled cheque)
- Photograph of the authorised signatory
- Board resolution / authorisation letter
- Digital Signature Certificate (for online filing)
- Shop & Establishment registration (where applicable)
Composition Scheme — Rarely Beneficial
- Composition Scheme: Available if turnover is below ₹1.5 Crore and no inter-state supply.
- Tax Rate: 1% flat on turnover (0.5% CGST + 0.5% SGST).
- Downside: No ITC. Recruitment agencies rely heavily on Naukri, LinkedIn Recruiter, ATS, and marketing ITC — so composition usually hurts.
- Recommendation: Most recruitment agencies should stay in the regular 18% scheme to claim ITC.
Takeaway: Multi-state placements trigger mandatory registration quickly. Plan for GST registration from Day 1 if you serve clients across states.
5. Is TDS Applicable on Recruitment Agency Payments? (194J at 10%)
Yes — TDS applies at 10% under Section 194J on recruitment agency payments. This is the single most important distinction between recruitment and manpower supply. Recruitment is a professional service — not a contract for work — so 194J applies, not 194C.
Why 194J, Not 194C
| Aspect | 194C (2%) | 194J (10%) |
|---|---|---|
| Nature | Contract for work / labour supply | Professional / technical services |
| Threshold | ₹30,000 single / ₹1,00,000 yearly | ₹30,000 yearly |
| Recruitment Fit | Does NOT apply | Applies — recruitment is professional |
| Manpower Fit | Applies — ongoing labour supply | Rarely applies |
Why Recruitment is Professional Service
- Skill-Based Service: Recruitment involves market knowledge, candidate assessment, and advisory judgment — clearly professional.
- One-Time Fee: The placement fee is a professional success fee — not monthly labour billing.
- No Ongoing Deployment: After placement, the candidate is the client's employee. Your service ends.
- Not Contract for Work: You don't produce a deliverable — you provide professional recruitment expertise.
TDS Threshold and Impact
Takeaway: Recruitment is 194J at 10% — not 194C at 2%. Budget for this higher TDS deduction in your cash flow planning.
6. Does Reverse Charge Apply on Recruitment Services?
No — reverse charge does NOT apply to recruitment services. Recruitment is a one-time professional service — it is not covered by the RCM notification for manpower supply or security services.
What RCM Notification 29/2019 Actually Covers
- Manpower Supply Services: Ongoing labour deployment from unregistered supplier to registered recipient — RCM applies.
- Security Services: Security guard deployment from unregistered supplier to registered recipient — RCM applies.
- Recruitment Services: One-time placement fee — NOT covered by RCM.
- HR Consultancy: Professional advisory — NOT covered by RCM.
When You Might Think RCM Applies (But It Doesn't)
- Sub-Contracting to Freelance Recruiters: If you pay a freelance recruiter a commission for a placement, it is a professional service — no RCM. If you pay them to supply manpower — that would be RCM, but that's not recruitment.
- Overseas Recruiters: Commission to foreign recruitment firms is import of service — RCM applies under the general import rule, not the manpower RCM rule.
- Candidate Sourcing Services: If a vendor only sources CVs but doesn't place — that might be a professional sourcing service, no RCM.
Why This Distinction Matters
- No Self-Invoice: Recruitment agencies don't need to issue self-invoices for sub-contracts.
- No Extra IGST Payment: No cash outflow for RCM on recruitment sub-contracts.
- No RCM Reporting: No Table 3.1(d) entries in GSTR-3B for recruitment services.
Takeaway: RCM does not apply to recruitment — but it does apply to foreign recruiter commissions under the general import rule. Know which one you're dealing with.
7. Can Recruitment Agencies Claim Input Tax Credit (ITC)?
Yes — recruitment agencies charging 18% GST can claim full ITC on business expenses. Because the output is taxable at 18%, ITC on inputs and input services is fully available. This is a major cash flow lever, especially given the high cost of job portal subscriptions.
What ITC Can Be Claimed
ITC on Naukri, LinkedIn Recruiter, Indeed, Monster, and Shine subscriptions.
ITC on applicant tracking systems, CRM software, and recruitment automation tools.
ITC on background check services (AuthBridge, OnGrid) if used for placements.
ITC on office rent, electricity, internet, and maintenance.
ITC on Google Ads, LinkedIn ads, and recruitment marketing.
ITC on candidate interview travel, hotel, and related expenses (if part of your service).
ITC on CA fees, legal fees, and consultant fees (if GST-registered).
ITC on reverse-charged foreign recruiter commissions (under general import RCM).
What ITC is Blocked
- Employee Salaries: No ITC on in-house recruiter salaries (GST not charged on salaries).
- Construction: ITC on office building construction is blocked under Section 17(5).
- Food & Beverages: ITC on staff canteen food is generally blocked.
- Personal Use: Any vehicle or equipment used for personal purposes must be excluded.
Takeaway: Job portal subscriptions are the biggest ITC item for recruitment agencies. Track every Naukri, LinkedIn, and Indeed invoice and claim aggressively.
8. What is the Difference Between Recruitment and Manpower Supply Under GST?
Both are taxed at 18% GST — but TDS treatment and RCM applicability differ drastically. Misclassifying your model is the most common source of notices and cash flow losses for agencies that do both.
Key Differences
| Aspect | Recruitment | Manpower Supply |
|---|---|---|
| GST Rate | 18% | 18% |
| TDS Section | 194J (10%) | 194C (2%) |
| RCM Applicable? | No | Yes (if supplier unregistered) |
| Billing | One-time per placement | Monthly per worker |
| Employment | Candidate = client's employee | Worker = your employee/contractor |
| Place of Supply | Client's registered address | Deployment site location |
| Service Nature | Professional / technical | Contract labour |
| SAC Code | 998511 | 998511 / 998519 |
The Hybrid Model Trap
- Watch Out: Some agencies do both — placing permanent candidates (recruitment) and supplying contract workers (manpower).
- Fix: Issue separate invoices with clear descriptions. Use different invoice series if helpful.
- Risk: If a single invoice mixes both, the client may apply one TDS section to the whole amount — either over-deducting (10% on manpower too) or under-deducting (2% on recruitment too).
• Recruitment invoice: ₹1,50,000 + 18% GST = ₹1,77,000 — TDS 194J at 10% (₹15,000)
• Manpower invoice: ₹60,000 + 18% GST = ₹70,800 — TDS 194C at 2% (₹1,200)
Keep both clearly separated on the invoice and the contract.
Takeaway: If you do both services, keep invoices distinctly separate. Two TDS sections, two compliance tracks, one client — do not merge them.
9. How to Invoice Placement Fees Under GST?
A GST-compliant invoice is the foundation of recruitment agency compliance. Each placement should have its own invoice with GSTIN, SAC code, and clear description.
Mandatory Fields on a Recruitment Invoice
- Agency name, address, and GSTIN
- Client name, address, and GSTIN
- Unique invoice number and date
- Description: "Permanent Placement Services — [Position] — [Candidate Name]"
- SAC Code: 998511 (temporary or permanent placement)
- Candidate's annual CTC and placement fee percentage (for transparency)
- Taxable value (the placement fee)
- GST rate (18%) and amount (CGST+SGST or IGST)
- Place of supply (client's registered address)
- Signature of authorised signatory
Billing Models and Invoicing
| Model | Invoicing Pattern |
|---|---|
| Contingency Recruitment | Single invoice after candidate joins |
| Retained Search | Three milestone invoices (typically 33% each at start, shortlist, joining) |
| RPO (Recruitment Process Outsourcing) | Monthly invoice for services rendered |
| Flat Fee Model | Single invoice after placement |
| Overseas Placements | Export invoice with LUT declaration, zero-rated |
• Agency: TalentBridge Recruiters, Bengaluru (GSTIN: 29XXXXX)
• Client: ABC Tech, Mumbai (GSTIN: 27XXXXX)
• Service: Permanent Placement — Senior Developer
• Candidate CTC: ₹18,00,000
• Placement Fee: 8.33% = ₹1,50,000
• SAC: 998511
• Taxable Value: ₹1,50,000
• IGST @ 18%: ₹27,000
• Total: ₹1,77,000
• TDS @ 10% under 194J: ₹15,000
• Net Payment: ₹1,62,000
Takeaway: Itemize the placement fee clearly. Show the candidate's CTC and fee percentage — this helps the client compute TDS correctly and reduces disputes.
10. How to Handle Free Replacement Guarantees Under GST?
If a candidate leaves within the guarantee period and you provide a free replacement, there is no GST impact. The original invoice remains valid, no credit note is issued, and no refund of GST happens. The replacement is a contract fulfillment, not a new supply.
Guarantee Scenarios and GST Treatment
| Scenario | GST Treatment |
|---|---|
| Free replacement provided (no refund) | No GST impact — original invoice stands |
| Placement fee refunded in full | Issue a credit note, reverse GST, claim ITC reversal |
| Partial refund (e.g., 50%) | Issue a partial credit note for the refunded amount |
| Replacement with additional fee | Charge GST on the additional fee via a new invoice |
When to Issue a Credit Note
- Trigger: When you refund the placement fee to the client (fully or partially).
- Timing: Issue within 30 September of the following financial year, or by the time of filing the annual return — whichever is earlier.
- Credit Note: Must include original invoice reference, refund amount, and GST reversal.
- Reporting: Report credit notes in Table 9B of GSTR-1.
- ITC Impact: If you've already claimed ITC on related expenses, adjust accordingly.
Best Practices for Guarantee Clauses
- State in Contract: Clearly define the guarantee period (e.g., 90 days) and replacement terms.
- Prefer Replacement: Offer replacement over refund whenever possible — avoids credit note complexity.
- Document Clearly: Keep a record of the guarantee claim, replacement, and any client communication.
- Avoid Automatic Refunds: Some clients ask for automatic refunds — align expectations in the contract.
Takeaway: Free replacement = no GST impact. Refund = credit note. Make this clear in the contract before the placement to avoid disputes.
11. Are Overseas Placements by Recruitment Agencies Export of Services?
Yes — recruitment for foreign employers is export of services and zero-rated under GST when you file an LUT (or pay IGST and claim refund). This is a major tax advantage for agencies serving international clients.
When Recruitment Qualifies as Export of Services
- Supplier in India: Your recruitment agency is based in India.
- Recipient Outside India: The client (employer) is located outside India.
- Place of Supply Outside India: The service is delivered to a foreign client.
- Payment in Convertible Forex: Payment received in USD, EUR, GBP, or other convertible currencies (or INR as permitted by RBI).
- Not Prohibited: The service is not in the negative list of exports.
LUT Filing for Export of Recruitment Services
No TDS on Overseas Placements
- Foreign Client Cannot Deduct Indian TDS: TDS under 194J applies only to Indian payers with a TAN.
- No Form 26AS Entry: Foreign payments don't appear in Form 26AS.
- FEMA Compliance: Ensure the payment flows through proper banking channels and is reported correctly.
Takeaway: Overseas placements are the most tax-efficient revenue stream for recruitment agencies. File LUT before your first international placement.
12. 10 Common GST Mistakes Recruitment Agencies Make (With Solutions)
Takeaway: The biggest GST risks for recruitment agencies come from applying the wrong TDS section (194C instead of 194J), wrong place of supply, and missing LUT on overseas placements.