How high GST rates are squeezing India’s security service providers

Human workforce as a service means providing businesses with skilled workers to handle specific tasks. 

In the security industry, this involves supplying trained security guards, supervisors, and other personnel to protect individuals and property. This allows companies to focus on their core operations while relying on specialised service providers to manage their workforce needs. 

Companies like HiTech Human Capital (India) Ltd (HHCiL) use this model to fill important roles in different sectors, ensuring smooth and safe operations.

Challenges of GST in the security services industry

In India, the security services industry plays a crucial role in safeguarding businesses, institutions, and individuals. 

Under Neeraj Tiwari's leadership, HHCiL has been at the forefront of this industry, providing essential services such as security solutions, facility management, and payroll management. 

However, the introduction of the Goods and Services Tax (GST) has brought about significant challenges for the sector.

When GST was introduced in July 2017, it marked a transformative shift in India’s taxation system. The Indian government introduced this tax system to streamline tax collection, eliminate the cascading effect of multiple taxes, and bring more businesses into the formal tax net. 

However, this change has introduced complexities and financial burdens for the security services industry, particularly under the Forward Charge Mechanism (FCM).

Understanding RCM and FCM in GST

Initially, security services were taxed under the Forward Charge Mechanism (FCM), meaning service providers like HHCiL were responsible for collecting and remitting GST to the government. This created a significant burden on companies that have thin margins and are responsible for paying high GST rates.

Due to difficulties in tax collection from numerous small service providers, the government introduced the Reverse Charge Mechanism (RCM) in January 2019 for any person other than body corporate. 

To improve the situation, industry leaders are now advocating for the adoption of the RCM for all corporate bodies.

Under RCM, the liability to pay GST would shift from the service provider to the service recipient. This change would reduce the financial pressure on security service companies and streamline the tax payment process. More importantly, this shift would help in preserving jobs for lakhs of security guards across the country.

The strain of high GST rates

Like many other companies in this sector, HHCiL charges service fees ranging from 3.85% to 10% for its services. However, the GST imposed on these services is a hefty 18%. This discrepancy creates a significant financial burden for companies, particularly smaller players in the market.

"The government, as a silent partner, earns 18% from our business while our service fees range between 3.85% to 10%,” Neeraj Tiwari pointed out.

This stark difference between what a company earns and what it pays in taxes poses a severe threat to the sustainability of businesses in the security services sector. The high GST rate also puts companies in a difficult position, as it forces them to either absorb the extra costs, which reduces their already small profits or pass these costs on to their clients. 

If the business decides to pass on these costs, it could potentially reduce demand for their services.

Advocating for a reduction in GST or RCM implementation

Facing the mounting challenges posed by the 18% GST under FCM, industry leaders are now increasingly advocating for a reduction in the tax rate or adopting the Reverse Charge Mechanism (RCM).

The shift to RCM would ease the financial strain on companies like HHCiL, allowing them to maintain their slim margins and continue offering competitive pricing to clients. By shifting the GST payment responsibility to the service recipient, companies in the security services sector will also be able to improve their cash flow, making it easier to sustain operations and grow.

"If the GST department does not reconsider the applicability of RCM, our industry could face a drastic collapse, leading to the closure of hundreds of private security agencies and the loss of jobs for lakhs of security guards,” Neeraj added.