India’s labour market continues to be dominated by informal work, with nearly 85% of workers operating outside formal systems. While this workforce contributes over half of India’s GDP, most workers lack
basic protections such as provident fund, health insurance, or job security. According to the Indian Staffing Federation (ISF), unless the upcoming Union Budget places formalisation at its core, India risks losing its demographic advantage, especially with a young population and rising global uncertainty.
ISF argues that informal hiring lowers productivity, deepens inequality, and slows sustainable job creation—particularly in labour-intensive sectors such as manufacturing, logistics, retail, and services.
High compliance costs push employers towards informal hiring
One of the biggest hurdles to formal job creation is the high cost of compliance. Staffing and manpower supply services attract 18% GST, making formal, agency-based hiring significantly more expensive than informal arrangements. This often pushes MSMEs to bypass structured hiring, even though it leads to higher attrition, legal risks, and skill mismatches.
ISF estimates that informal employment caps productivity at nearly half of formal-sector levels and results in annual tax losses of over Rs 16,200 crore.
Key Budget asks: GST cut, women hiring push, worker housing
To address these gaps, ISF has proposed three targeted reforms to the Ministry of Finance:
1. Cut GST on staffing services to 5%
ISF has urged the government to treat employment-related staffing services as “merit services” and reduce GST from 18% to 5%. A lower rate would make formal hiring affordable, expand EPFO and ESIC coverage, and encourage companies to shift away from informal contracts.
2. Revamp Section 80JJAA to boost women hiring
The federation has also sought changes to Section 80JJAA, which offers tax deductions for new formal hires. ISF recommends a women-specific incentive slab and inflation-linked thresholds, noting that existing limits have remained unchanged for years. This move could help convert rising female labour participation into stable, formal jobs.
3. Allow CSR funds for worker hostels in industrial hubs
ISF wants clearer rules allowing companies to use CSR funds to build worker hostels and support facilities in manufacturing clusters. Safe housing, especially for migrant and women workers, is seen as critical for retention, attendance, and workforce stability.
Why it matters for growth and revenues
According to ISF, these reforms could significantly expand the formal workforce, improve job quality, and raise tax revenues without new subsidies. Formalisation, it says, is not just a labour reform—but a growth strategy aligned with India’s Viksit Bharat 2047 vision.
Finance Minister Nirmala Sitharaman will present the upcoming budget 2026 on Sunday, February 01, 2026 in the Parliament.
