Informality: A Major Issue
India's labor market is significantly characterized by informal employment, with a staggering 85% of the workforce operating outside the formal sector.
This widespread informality has significant implications, including reduced productivity and substantial tax losses. The Indian Staffing Federation (ISF) highlights that this situation hinders economic progress, and the upcoming Union Budget 2026 presents a crucial opportunity for transformative change. The ISF believes that if formalization isn't addressed, India risks losing its demographic advantage, particularly with its young population and the backdrop of global uncertainty. The informal employment structure impacts job quality and reduces worker access to essential benefits like provident funds, health insurance, and job security, which are standard in formal employment setups. This situation highlights the urgency of addressing the issue.
Addressing High Compliance Costs
A significant obstacle to formal job creation is the high cost of compliance, a point that the ISF underscores. Staffing and manpower supply services currently attract an 18% GST, making formal hiring through agencies more expensive than informal arrangements. This disparity encourages micro, small, and medium enterprises (MSMEs) to bypass structured hiring, despite the higher attrition, legal risks, and skill mismatches that this practice entails. The ISF is advocating for a reduction in GST on staffing services to 5%. This change would make formal hiring more affordable, broaden the coverage of Employee Provident Fund Organization (EPFO) and Employee State Insurance Corporation (ESIC), and encourage companies to opt for formal contracts over informal arrangements. This shift is crucial for fostering a more compliant and robust labor market.
Boosting Women's Employment
The ISF is also pushing for specific measures to enhance women's participation in the formal workforce. This includes revamping Section 80JJAA, which provides tax deductions for new formal hires, by incorporating a women-specific incentive slab and inflation-linked thresholds. The ISF points out that the existing limits have remained unchanged for years, diminishing their effectiveness. By implementing these changes, the government could transform the increasing female labor participation into stable, formal employment opportunities. This initiative is designed to create a more inclusive and productive workforce. The federation recognizes the importance of creating a conducive environment for women in the workplace and suggests tailored tax incentives as a way to achieve this.
Worker Housing: A Key Element
The ISF has also proposed using Corporate Social Responsibility (CSR) funds to build worker hostels and support facilities, particularly in manufacturing clusters. The federation stresses the importance of safe housing, especially for migrant and women workers, as a critical factor for retention, attendance, and overall workforce stability. Clearer rules enabling companies to utilize CSR funds for these purposes are seen as essential. This initiative recognizes the importance of providing a supportive environment for workers. By ensuring basic amenities, these measures aim to reduce attrition and boost overall workforce productivity.
Why Formalization Matters
The ISF argues that formalization is not merely a labour reform but a comprehensive growth strategy aligned with India’s Viksit Bharat 2047 vision. According to the ISF, the reforms they propose—including reduced GST, women-centric incentives, and CSR-funded worker hostels—could significantly expand the formal workforce. It aims to improve job quality and increase tax revenues without introducing new subsidies. The federation estimates that informal employment caps productivity at nearly half of formal sector levels, leading to annual tax losses exceeding Rs 16,200 crore. These measures, if implemented, will have a positive impact on various sectors. Formalization is considered essential for driving sustainable job creation, especially in labor-intensive industries like manufacturing, logistics, retail, and services, and for reducing income inequality.
