FROM AMBIGUITY TO ASSURANCE — FINANCE BILL 2026 BRINGS STATUTORY CLARITY TO TDS ON MANPOWER SUPPLY- PART I

When Workforce Mobility Meets Tax Certainty

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'A fleeting moment seems an eternity; what remains unexplained becomes a source of endless confusion.'

Few areas of tax deduction at source have reflected this confusion as vividly as the classification of manpower supply arrangements.

India's service economy has experienced a significant structural transformation over the past twenty years. The contemporary business environment increasingly depends on specialised outsourcing arrangements, flexible staffing models, and workforce deployment via professional manpower supply agencies. From facility management firms maintaining corporate infrastructure to technology staffing companies deploying specialised professionals, manpower supply has become an essential pillar of operational efficiency. Organisations across sectors such as manufacturing, healthcare, banking, infrastructure, hospitality, and information technology regularly engage third-party agencies to deploy workforce resources tailored to variable operational demands.

The outsourcing of human resources has become not merely a cost-management tool but a strategic imperative for modern enterprises. Companies recognise that maintaining a permanent workforce to meet perpetually fluctuating demand often creates inefficiencies and constrains financial flexibility. By engaging manpower supply agencies, organisations can dynamically scale their workforce, access specialised talent pools, manage statutory compliance burdens, and optimise operational costs. This paradigm shift has fundamentally altered how labour and services are procured, yet the taxation framework governing such arrangements has not evolved in tandem with commercial practice.

Despite the rapid evolution of business practices, the tax deduction at source (TDS) framework has struggled to provide conceptual clarity on the classification of payments for manpower supply. Ongoing interpretive disputes have arisen over whether such payments should be treated as contractual payments for the execution of work or as fees for professional or technical services. Because each classification entails different TDS rates and compliance implications, this ambiguity has created litigation risk, inconsistent industry practices, and administrative uncertainty. Organisations have found themselves caught between competing interpretations by revenue authorities, tribunals, and advisory bodies, each applying divergent criteria to classify identical commercial arrangements.

Acknowledging these challenges and the pressing need for legislative certainty, the Finance Bill, 2026, proposes to explicitly include manpower supply within the definition of 'work,' thereby providing long-sought clarity in this pivotal area of tax administration. This amendment represents a significant milestone in Indian tax jurisprudence, transforming decades of judicial interpretation and administrative ambiguity into concrete statutory guidance.

Statutory Amendment Under Finance Bill, 2026

Clause 78 of the Finance Bill, 2026, proposes a targeted amendment in section 402 of the Income-tax Act, 2025 [which replaces the earlier Income-tax Act, 1961]. In clause (47), which defines the term 'work', a new sub-clause is proposed to be inserted, which reads as follows:

'(f) supply of manpower to a person to work under his supervision, control or direction.'

This insertion seeks to provide a statutory anchor for classifying manpower supply arrangements within the contractor-based TDS framework established under section 393(1) of the Income-tax Act, 2025. The amendment is proposed to take effect from 1st April, 2026, thereby applying from the financial year 2026-27 onwards. This timing provides organisations with a reasonable implementation window to review existing contractual arrangements and align compliance procedures with the revised statutory framework.

The significance of this amendment cannot be overstated. By explicitly recognising manpower supply as a category of 'work,' the legislature has chosen a mechanism that automatically triggers the contractor-based TDS provisions, thereby eliminating the need for case-by-case judicial determination. This legislative approach reflects a conscious policy decision to prioritise administrative certainty and simplicity of compliance over open-ended judicial interpretation.

Understanding the Legislative Background of the Existing TDS Structure

Before analysing the proposed amendment, it is essential to understand the current TDS framework governing payments for work and services. Section 393(1) of the Income-tax Act, 2025 sets out the mechanism for tax deduction at source for payments made for work performed under a contract or for professional or technical services. This provision specifies different deduction rates based on the type of payment and the recipient's status. The structure operates on a tiered approach, recognising that different service categories carry differing risk profiles and administrative considerations. The provisions broadly correspond to the earlier framework under sections 194C and 194J of the erstwhile Income-tax Act, 1961, thereby ensuring conceptual continuity while adopting modernised legislative drafting.

The Contractor Payment Framework

According to the contractor payment framework outlined in Table Sl. No. 6(i) of section 393(1), payments for any work undertaken are subject to tax deduction at a rate of one per cent when the contractor is either an individual or a Hindu Undivided Family (HUF). In all other cases—where the contractor is a partnership, company, or other entity—the deduction rate is 2%. This differential rate structure reflects legislative recognition that individual contractors and HUFs typically operate with simpler compliance infrastructure and deserve marginally favourable treatment compared with larger business entities.

The term 'work' under this provision traditionally encompasses construction activities, manufacturing operations, repair and maintenance services, and other forms of labour-intensive contractual performance. The legislative intent behind this category is to capture payments for discrete, identifiable tasks executed by the contractor under a defined contractual arrangement.

The Professional Services Framework

Separately, Table Sl. No. 6(ii) of section 393(1) stipulates a deduction rate of two per cent for payments made by individuals or HUFs related to commission, brokerage, or professional services not explicitly covered elsewhere. Thus, this provision applies where payments are made by individuals or HUFs for activities falling outside the scope of contractual work but not specifically classified under Table 6(iii).

Furthermore, Table Sl. No. 6(iii) classifies professional or technical services on a distinct basis. It prescribes a deduction rate of 2% for specified technical services (such as computer-related, communication, and information technology services) and for royalties related to the sale, distribution, or exhibition of cinematographic films, or payments to businesses engaged in the operation of call centres. Significantly, a substantially higher rate of ten per cent applies to other professional services not specifically enumerated—such as legal advisory fees, medical consultancy, management consultancy, and architectural services. The higher deduction rate historically reflected the perception that professional services involved higher income margins and lower expense structures.

The Interpretive Challenge

While this layered structure was intended to provide a comprehensive classification of diverse commercial arrangements, manpower supply contracts often exhibited characteristics that overlapped across multiple categories, creating profound interpretive conflicts. The lack of explicit statutory guidance on manpower supply classification meant that tax authorities, assessees, and judicial bodies applied different lenses to identical contractual arrangements, resulting in inconsistent outcomes and unnecessary litigation.

The Core Controversy — Contractual Work Versus Professional or Technical Services

The primary dispute concerning manpower supply agreements originated from the inherent dual nature of these contracts. In numerous business situations, manpower providers simply assign or deploy personnel to execute designated tasks under the supervision and administrative authority of the recipient organisation. Such arrangements closely resemble labour contracts or employment relationships and therefore fall within the scope of contractual work as traditionally understood. Nevertheless, in specific instances, manpower provision entails the deployment of specialised or technically qualified personnel—such as software engineers, chartered accountants, management consultants, or other professionals—causing tax authorities to occasionally interpret such payments as fees for technical or professional services rather than labour supply.

This dual characterisation created inconsistent tax positions across industries. In some cases, the inconsistency was visible even within the same sector.For instance, when a corporate entity engaged security personnel, housekeeping staff, or clerical workers through an agency, the arrangement was generally treated as a contractual deployment of labour. Such arrangements usually attracted TDS at 1–2%.

However, a different view was sometimes taken when agencies deployed software engineers, business analysts, or other technical specialists. In such cases, revenue authorities occasionally treated the payments as fees for technical services. As a result, these payments were subject to a 10% TDS on unspecified professional services. This rate was significantly higher than the contractor-based TDS provisions.

The lack of statutory clarity necessitated reliance on judicial precedents and highly fact-specific interpretation of individual contracts, often leading to protracted litigation between assessees and revenue authorities. This uncertainty created the following undesirable outcomes:

First, businesses could not confidently predict the tax treatment of manpower supply arrangements at the time of contract formation. Organisations were forced to make assumptions about TDS classification, knowing that revenue authorities might challenge those assumptions during subsequent assessments, potentially triggering demands for additional tax, penalties, and interest.

Second, the inconsistency across industries undermined the principle of horizontal equity. Two identically structured manpower supply arrangements in different sectors—or even within the same sector but assessed by different authorities—could receive different tax treatment, creating competitive distortions and compliance inequities.

Third, businesses engaged in staffing, recruitment, and facility management faced disproportionate regulatory uncertainty, as their entire business models hinged on TDS classification. This uncertainty deterred investment in the staffing sector and created compliance burdens that manufacturers and service providers operating with permanent workforces did not face.

Legislative Resolution through the Control and Supervision Principle

The new sub-clause (f) to section 402 (47) proposes a solution grounded in a fundamental principle of labour law and taxation: the control and supervision doctrine. The amendment clarifies that manpower supply should be considered 'work' when personnel operate under the supervision, control, or direction of the service recipient.

This control-based criterion represents a sophisticated legislative response to the classification challenge. Rather than attempting to enumerate every conceivable form of manpower supply or imposing rigid rules based on the skill level of deployed personnel, the legislature has therefore adopted an objective, principle-based test. The test focuses on the locus of operational control. Similar control-based tests have historically been recognised by Indian courts while distinguishing employer-employee relationships from independent contractor arrangements, particularly in labour jurisprudence.

The Conceptual Foundation

The control and supervision principle operates on the following logic: When a manpower supplier deploys personnel and the recipient organisation exercises operational control—determining work schedules, assigning specific tasks, supervising day-to-day performance, directing methodologies, and exercising disciplinary authority—the substance of the arrangement is labour deployment rather than the provision of an independent professional service. The supplier's role is to source, screen, and administer human resources; the recipient's role is to direct and supervise their work.

Conversely, if a service provider engages to deliver specified outcomes using its independent professional judgment, exercising autonomous methodological choices, and operating without day-to-day supervision or task direction from the client, the arrangement more closely resembles a professional service engagement. In such cases, the provider exercises control over the manner and method of work execution.

This distinction is not novel. It reflects established principles in common law jurisdictions, distinguishing between employees (subject to supervision and control) and independent contractors. Indian labour law similarly distinguishes between 'workmen' (entitled to statutory protections) and independent contractors based substantially on the degree of control exercised by the entity engaging their services. The proposed amendment effectively imports this well-established doctrinal framework into the tax classification arena.

 Implications of the Control Test

The control and supervision principle substantially reduces interpretive subjectivity and provides an objective standard for classification that can be applied consistently across sectors. The emphasis shifts decisively from the skill level or technical qualifications of deployed personnel to the degree and nature of control exercised over them by the recipient.

This reorientation is crucial. Under prior ambiguous regimes, tax authorities sometimes classified highly skilled deployed personnel as 'technical services' regardless of whether the recipient exercised control. The control test reverses this logic: even highly skilled professionals—if deployed under the recipient's supervision and control—constitute a manpower supply attracting contractor TDS rates. However, mere contractual wording cannot override actual operational control, which would remain determinative.

Practical Operation of TDS Provisions after The Proposed Amendment

Following the amendment's implementation on 1st April, 2026, manpower supply arrangements within the control and supervision framework will be governed by the contractor-based TDS provisions outlined in section 393(1), Table Sl. No. 6(i) and 6(ii).

Rate Structure Post-Amendment

Where payments are made to individual or HUF manpower suppliers, tax will be deducted at the rate of 1% of the payment amount. Where payments are made to companies, partnership firms, Limited Liability Partnerships, or other business entities, a deduction will be applicable at the rate of 2% of the payment amount. This classification substantially reduces exposure to the higher deduction rates previously applicable under professional service provisions—particularly the 10% rate for unspecified professional services.

The rate reduction carries significant financial implications. Consider a scenario where an organisation makes monthly payments of Rs. 50 lakh to a manpower supply agency. Under prior ambiguous regimes, if revenue authorities classified such payments as professional services, the organisation faced a 10% TDS liability of Rs. 5 lakh per month, or Rs. 60 lakh annually. Under the amended framework, the same payments attract 1-2% TDS—Rs. 50,000 to Rs. 1,00,000 monthly, or Rs. 6-12 lakhs annually. This represents a substantial reduction in TDS burden, improving working capital efficiency and reducing compliance costs. It is important to recognise that a reduction in the TDS rate affects only cash-flow timing, not the ultimate tax liability of the manpower supplier.

ILLUSTRATIONS OF FIVE KEY SECTORS

The true efficacy of any clarificatory amendment lies in its implementation in real-world commercial arrangements. The proposed inclusion of manpower supply within the definition of 'work' is particularly significant when analysed through practical deployment scenarios commonly encountered across industries.

Illustration 1: Security Services Arrangement

Aayra Ltd. is a large manufacturing company that operates a sprawling factory complex with multiple entry points and security-sensitive areas. The company engages a professional security agency to deploy trained security guards. The agency recruits, screens, trains, and remunerates the guards, maintaining employment records and statutory compliance.

However, functional and operational control resides with the recipient, Aayra Ltd.  The company's security manager determines duty rosters, allocates guards to specific gates, supervises attendance, issues operational instructions, and exercises disciplinary authority. Guards report to the company's security chief and follow company protocols.

Pre-amendment: Authorities sometimes classified this as a 'specialised security service' subject to a 10% TDS.
Post-amendment: Clear manpower supply under recipient control ? 1-2% contractor TDS.

Reasoning Snapshot: The agency deploys security guards, but the recipient, Aayra Ltd., determines their day-to-day duties, duty locations, shift allocations, and operational instructions. Since the recipient Aayra Ltd. exercises functional supervision and operational control over the personnel, the arrangement qualifies as manpower supply falling within the definition of “work”, thereby attracting contractor-based TDS.

Illustration 2: Corporate Facility Management — Housekeeping

Harpreet Ltd. engages facility management agencies for cleaning and maintenance staff. The agency manages HR administration, but the recipient's facility manager determines schedules, assigns zones, conducts inspections, and addresses performance issues. Personnel report to the recipient Harpreet Ltd.’s supervisors and follow the recipient's protocols.

Pre-amendment: Occasional disputes over 'specialised facility management services.'
Post-amendment: Clear manpower supply ? 1-2% contractor TDS.

Reasoning Snapshot: Although the facility management agency handles recruitment, payroll, and statutory compliance, the actual work allocation, scheduling, inspection, and performance monitoring are undertaken by the recipient, Harpreet Ltd.’s facility manager. The existence of direct supervision and control by Harpreet Ltd. establishes the arrangement as a manpower supply under the statutory definition of “work”.

Illustration 3: Technology Staffing — IT Developers

Canara Bank hires an IT staffing firm to provide software developers for a core banking project. The staffing firm handles recruitment and payroll, but Canara Bank ‘sproject managers allocate modules, review code against bank standards, assign tasks through bank systems, and determine technical direction. Developers work within the bank's premises/systems, following the bank's protocols.

Pre-amendment: Often classified as 'technical services' at 10% TDS despite Canara Bank's control.
Post-amendment: Skilled personnel under bank control = manpower supply ? 1-2% TDS.

Reasoning Snapshot: Despite the technical skill and professional qualifications of the deployed personnel, the developers perform tasks assigned by the recipient’s project managers and operate within the recipient’s technological and procedural framework. Since the recipient, Canara Bank, directs and supervises the execution of the work, the arrangement constitutes manpower supply rather than independent technical services.

Illustration 4: Healthcare — Nursing Staff

BLK- Max Hospital engages nursing agencies for patient care staff. Agencies handle payroll/compliance, but BLK- MaxHospital’s administration determines shifts, patient assignments, clinical protocols, and supervision. Nurses follow hospital hierarchies and standards.

Pre-amendment: Disputes over 'specialised nursing services.'
Post-amendment: Hospital control = manpower supply ? 1-2% TDS.

Reasoning Snapshot: The nursing agency performs administrative employer functions, including salary disbursement and statutory compliance. However, shift planning, patient assignment, clinical protocols, and performance supervision are managed by BLK-Max Hospital. The hospital's operational and clinical control establishes the deployment as a manpower supply under the amended definition.

Illustration 5: Infrastructure — Construction Labour

Kirti Ltd. is a construction company that engages labour contractors for excavation, material handling, and site support. Contractors manage payroll/compliance, but site engineers allocate tasks, supervise execution, and oversee quality. Workers report to Kirti Ltd.’s supervisors.

Post-amendment: Clear site control = manpower supply ? 1-2% contractor TDS.

Reasoning Snapshot: The labour contractor manages workforce sourcing and wage compliance, while the site engineers at the recipient, Kirti Ltd., allocate tasks, supervise execution, and monitor quality and safety standards. Since the recipient controls the manner and method of work execution, the arrangement qualifies as manpower supply covered under contractor TDS provisions

It is noted that the names in the illustrations are fictional and used solely for academic demonstration.

Legislative Intent Emerging from Practical Illustrations

Collectively, these illustrations demonstrate the legislative intent behind the amendment — to prioritise the substance of operational control and supervision over the skill level or designation of deployed personnel. The amendment seeks to establish uniformity, reduce litigation, and provide a predictable TDS framework by recognising that, where manpower functions under the recipient’s direction, the arrangement constitutes labour deployment rather than independent professional or technical services.

The Road Ahead — From Legislative Clarity to Practical Implementation

The amendment proposed under the Finance Bill, 2026, marks a major step towards resolving long-standing uncertainty in TDS classification for manpower supply arrangements. It provides organisations with clear guiding principles and introduces lower contractor-based TDS rates of 1–2% for genuine manpower deployment across sectors such as security services, facility management, IT staffing, healthcare, and construction. However, statutory clarity alone does not complete the journey. Effective implementation will depend upon judicial interpretation, sector-specific adaptation, and strong compliance systems within organisations.

Part II of this article examines how important judicial precedents, such as Associated Cement, Bharti Cellular, and Glenmark, have influenced this legislative development. It also examines the practical impact of the proposed amendment across industries, highlights opportunities for GST and income tax alignment, discusses remaining grey areas in hybrid arrangements, and provides a detailed compliance roadmap for the transition to the FY 2026–27 framework.

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The paths once covered in mist have now found light;
True clarity emerges only when understanding reaches the depth of truth.