GST on Works Contract: Everything You Need to Know
AuthorMehul Jagwani
Reviewed ByCA Ajay Savani
Have you ever wondered how much GST to pay before signing a works contract? Well, this is normal. Many contractors still get confused when it comes to levying GST on material supplied and labour service offered. This is the reason why we are writing this blog.
In this blog, we will explore what a works contract is, how it is treated under GST, and cases where ITC is available.
What is a Works Contract Under GST?
A works contract is simply a combination of the sale of goods and the provision of services together.
For example, when a contractor builds a house, he's providing labor (services), but he's also providing the cement, bricks, steel, etc. (goods), so it is a dual transaction.
Under the previous taxation system, these types of transactions led to a lot of confusion. VAT was levied on goods, while Service Tax was levied in labour cost. Due to this the calculation and return filing was difficult.
When GST was introduced, it clubbed both the taxes and treated works contracts as a supply of service. This will make the invoicing process easier regardless of the type of project.
The legal definition under Section 2(119) of the CGST Act, 2017 includes contracts for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration, or commissioning of any immovable property. This is a broad definition, and it covers almost everything that is being done in the infrastructure and real estate space.
GST on Government Works Contracts: Special Rules Apply
If you are dealing in government contracts, these are some special rules with regard to GST that you should know:
The government, as a recipient of works contract services, has its own special GST provisions that affect the billing, GST rates, and even who is responsible for paying the tax.
Reverse Charge Mechanism (RCM)
One of the main areas of difference when dealing with government contracts under GST is the use of the Reverse Charge Mechanism. In simple terms, under RCM, the liability to pay tax passes from the supplier to the receiver. Therefore, in place of the contractor collecting and paying GST, it is the government department receiving the service that pays the GST on the contractor's behalf.
This occurs where:
- The supplier is an unregistered person.
- The receiver is a government entity.
- The services fall within the categories of services that have been notified for RCM purposes.
Why is this important?
Because it impacts cash flow. Contractors that work for the government may not need to collect GST in all cases. However, contractors working for the government should clearly establish whether RCM is applicable or not, since incorrect classification could result in penalties.
Applicable Rate for Government Works Contracts
For new works concerning government infrastructure, the applicable GST rate is 12% for the following construction contracts.
- Construction of roads, bridges, tunnels, and airports
- Construction of government buildings, including schools, hospitals, courts, etc.
- Construction of railway infrastructure
- Irrigation infrastructure
It is worth noting that the 12% GST rate applies to original works. If the contractor is contracted for maintenance, repair or renovation of the above-mentioned government structures, then the GST increases to 18%.
GST on Works Contract
The following is the applicable HSN code and GST rates for various classes of works contract:
| HSN Code | Description | GST Rate |
| 9954 | (iii) Composite supply of works contract as defined in clause (119) of Section 2 of the CGST Act, supplied to the Central Government, state governments, Union Territories or a local authority by way of construction, commissioning, erection, installation, completion, fitting out, maintenance, repair, renovation, or alteration of- (a) a historical monument, archaeological site or remains of national importance, archaeological excavation, or antiquity specified under the Ancient Monuments and Archaeological Sites and Remains Act, 1958 (24 of 1958) (b) canal, dam or other irrigation works;(c) pipeline, conduit or plant for- (i) water supply (ii) water treatment, or(iii) sewerage treatment or disposal. | 12% |
| 9954 | (iv) Composite supply of works contract as defined in clause (119) of Section 2 of the CGST Act, (other than that covered by items (i), (ia), (ib), (ic), (id), (ie) and (if) under construction services), supplied by way of construction, commissioning, erection, installation, completion, fitting out, maintenance, repair, renovation, or alteration of- (a) A road, tunnel, bridge, or terminal for road transportation for use by general public (b) A civil structure or any other original works pertaining to a scheme under the Jawaharlal Nehru National Urban Renewal Mission or Rajiv Awaas Yojana (c) A civil structure or any other original works pertaining to the “ln-situ redevelopment of existing slums using land as a resource, under the Housing for All (Urban) Mission/Pradhan Mantri Awas Yojana (Urban) (d) A civil structure or any other original works pertaining to the “Beneficiary led individual house construction/enhancement” under the Housing for All (Urban) Mission/Pradhan Mantri Awas Yojana (da) A civil structure or any other original works pertaining to the “Economically Weaker Section (EWS) houses” constructed under the affordable housing in partnership by State or Union Territory or local authority or urban development authority under the Housing for All (Urban) Mission/Pradhan Mantri Awas Yojana (Urban) (db) A civil structure or any other original works pertaining to the “houses constructed or acquired under the Credit Linked Subsidy Scheme for Economically Weaker Section (EWS)/ Lower Income Group (LIG)/ Middle Income Group-1 (MlG-1)/ Middle Income Group-2 (MlG-2)” under the Housing for All (Urban) Mission/ Pradhan Mantri Awas Yojana (Urban) (e) A pollution control or effluent treatment plant, except located as a part of a factory; or (f) A structure meant for funeral, burial or cremation of deceased, provided that during the period beginning from 14th June 2021 and ending on 30th September 2021, the central tax on service of description specified in clause (f), shall be levied at the rate of 5% (g) A building owned by an entity registered under Section 12AA [or 12AB] 21 of the Income Tax Act which is used for carrying out the activities of providing centralised cooking or distribution for mid-day meals under the mid-day meal scheme sponsored by the Central Government, state governments, Union Territories or local authorities.]22 | 12% |
| 9954 | (v) Composite supply of works contract as defined in clause (119) of section 2 of the CGST Act, (other than that covered by items (i), (ia), (ib), (ic), (id), (ie) and (if) under construction services), supplied by way of construction, erection, commissioning, or installation of original works pertaining to- (a) Railways, excluding monorail and metro (b) A single residential unit otherwise than as a part of a residential complex (c) Low-cost houses up to a carpet area of 60 sq.m. per house in a housing project approved by a competent authority empowered under the 'Scheme of Affordable Housing in Partnership' framed by the Ministry of Housing and Urban Poverty Alleviation, Government of India (d) Low-cost houses up to a carpet area of 60 sq.m. per house in a housing project approved by the competent authority under-(1) The “Affordable Housing in Partnership” component of the Housing for All (Urban) Mission/Pradhan Mantri Awas Yojana(2) Any housing scheme of a State Government; (da) low-cost houses up to a carpet area of 60 sq.m. per house in an affordable housing project which has been given infrastructure status vide notification of Government of India, in Ministry of Finance, Department of Economic Affairs vide F. No. 13/6/2009-INF, dated the 30th March 2017 (e) Post-harvest storage infrastructure for agricultural produce including a cold storage for such purposes (f) Mechanised food grain handling system, machinery or equipment for units processing agricultural produce as food stuff excluding alcoholic beverages. | 12% |
| 9954 | (va) Composite supply of works contract as defined in clause (119) of Section 2 of the CGST Act, other than that covered by items (i), (ia), (ib), (ic), (id), (ie) and (if) under construction services, supplied by way of construction, erection, installation, completion, commissioning, fitting out, maintenance, repair, renovation, or alteration of affordable residential apartments covered by sub- clause (a) of clause (xvi) of paragraph 4 in a project which commences on or after 1 st April 2019, or in an ongoing project in respect of which the promoter has not exercised the option to pay integrated tax on construction of apartments at the rates as specified for item (ie) or (if), as the case may be, in the manner prescribed therein* | 12% |
| 9954 | (vi) Composite supply of works contract as defined in clause (119) of section 2 of the CGST ACT, (other than that covered by items (i), (ia), (ib), (ic), (id), (ie) and (if) under construction services), provided to the Central Government, state governments, Union Territories or a local authority, by way of construction, erection, installation, completion, commissioning, fitting out, maintenance, repair, renovation, or alteration of- (a) A civil structure or any other original works meant predominantly for use other than for commerce, industry, or any other business or profession (b) A structure meant predominantly for use as (i) An educational,(ii) A clinical, or(iii) An art or cultural establishment; or (c) A residential complex predominantly meant for self-use or the use of their employees or other persons specified in paragraph 3 of the Schedule III of the Central Goods and Services Tax Act, 2017. [Explanation- For the purposes of this item, the term ‘business’ shall not include any activity or transaction undertaken by the Central Government, state governments, or any local authority in which they are engaged as public authorities.] | 12% |
| 9954 | (vii) Composite supply of works contract as defined in clause (119) of section 2 of the CGST Act, involving predominantly earth work constituting more than 75% of the value of the works contract provided to the Central Government, a state government, Union Territory or a local authority. | 5% |
| 9954 | (viii) Composite supply of works contract as defined in clause (119) of section 2 of the CGST Act, and associated services in respect of offshore works contract relating to oil and gas exploration and production (E&P) in the offshore area beyond 12 nautical miles from the nearest point of the appropriate baseline. | 12% |
| 9954 | (ix) Composite supply of works contract as defined in clause (119) of section 2 of the CGST Act, provided by a sub-contractor to the main contractor providing services specified in item (iii) or item (vi) above to the Central Government, state governments, Union Territories or a local authority. | 12% |
*1. Provided that the carpet area of the affordable residential apartments as specified in the entry in column (3) relating to this item is not less than 50% of the total carpet area of all the apartments in the project.
2. Provided also that for the purpose of determining whether the apartments at the time of supply of the service are affordable residential apartments covered by subclause (a) of clause (xvi) of paragraph 4 below or not, the value of the apartments shall be the value of similar apartments booked nearest to the date of signing of the contract for the supply of the service specified in the entry in column (3) relating to this item.
3. Provided also that in case it turns out that the carpet area of the affordable residential apartments booked or sold before or after completion, for which the gross amount actually charged was forty five lakhs rupees or less and the actual carpet area was within the limits prescribed in sub-clause (a) of clause (xvi) of paragraph 4 was less than 50% of the total carpet area of all the apartments in the project, then the recipient of the service, i.e. the promoter will be liable to pay such amount of tax on reverse charge basis equal to the difference between the tax payable on the service at the applicable rate but for the rate prescribed herein and the tax actually paid at the rate prescribed herein.
ITC on Works Contract Under GST
Section 17(5) of the CGST Act, 2017 specifies that Input Tax Credit (ITC) on goods or services used for the construction of immovable properties is blocked for the suppliers of such goods and services.
For example, a company pays a contractor Rs. 10 lakh plus 18% GST (Rs. 1.8 lakh) to construct a warehouse for its own business. That Rs. 1.8 lakh is gone. The company cannot use it to offset any future GST liability.
When Can ITC Be Claimed On Works Contracts?
There are two exceptions.
1. If the works contract services are purchased for supplying other works contract services, then ITC can be claimed.
2. If the works contract services are for plant and machinery, ITC can be claimed.
For example, if a manufacturing company has a piece of equipment or machinery installed as part of a works contract, they can claim the GST for that expense.
Both of these exceptions are very limited, and outside of these exceptions, ITC for work contracts is blocked.
Closing Notes
We hope that after reading the blog, you understand how to deal with work contracts under GST and in what cases ITC can be claimed. If you are still confused, the good news is that there are tools like Munim Accounting and Billing that make invoicing and GST calculations easier. You can also file your GST returns with Munim GST Return Filing software to make your GST compliance smoother.
Frequently Asked Questions on Works Contract
What is a work contract?
A works contract is a contract that includes both the sale of goods and services together for the purpose of building, repairing or renovating an immovable property.
What is the composite supply of the works contract?
A works contract is a composite supply of services and goods, which are naturally combined with the construction service as the primary supply.
Is RCM applicable to works contracts under GST?
Yes, the reverse charge mechanism (RCM) applies when works contract services are received from an unregistered supplier or when services are supplied to a government entity.
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