Processing fee versus salary funds
The central question in payroll outsourcing is the taxable value. When the client employs the staff and the processor only computes salaries, prepares payslips and files returns, the processor's supply is the processing service, and GST at 18% applies only to its fee. Salary money that the client funds into an account for disbursement, and statutory dues remitted from it, belong to the client and its employees; the processor has no title to them. Keep them out of the invoice and document the flows separately, so the money passing through is not mistaken for turnover.
Payroll staffing is different
Long-term staffing on pay roll, coded 998515, and co-employment staffing, 998517, are supplies in which the provider becomes the legal employer of the staff. There, wages and statutory costs are the provider's own costs and form part of the taxable value, with GST at 18% on the full bill. Firms offering both models should use separate contracts and separate codes, because an employer-of-record client pays tax on the whole cost while a processing client pays it only on the fee.
Code and rate
The official SAC list codes payroll services at 998223 under heading 9982, legal and accounting services. The services rate notification taxes this heading at 18%, and it was not changed in September 2025. TDS return preparation can be coded under other tax consultancy, 998239.
Multi-entity and multi-state clients
A group with companies in several states needs a separate invoice to each company's GSTIN, because each must claim its own input credit. The processor's place of supply for a registered recipient is the recipient's location, so a Bengaluru processor billing a Maharashtra company charges IGST.
Advance fees and annual contracts
Payroll contracts sometimes carry an annual implementation fee for setting up the software and masters. Invoice it when the implementation is complete or as the contract sets, and keep it separate from monthly processing so the client can capitalise or expense each appropriately.
Data protection and records
Payroll data is sensitive. The invoice should not list employee names or salaries; a headcount and summary is enough. Detailed registers go to the client through secure channels, not with the tax invoice.
Software-only payroll subscriptions
Some providers sell payroll software that the client's HR team runs itself, rather than a managed processing service. A subscription to cloud payroll software is an IT service, closer to 998315 or software access, than an accounting service under 998223, though both carry 18%. If the provider offers software plus a processing team, split the invoice into a software subscription line and a processing line, each with its own code. This matters when clients analyse their spend or when a provider's HSN summary in GSTR-1 is reviewed against its contracts, and it makes it obvious which part of the bill stops if the client moves the processing in-house.