While GST has created a unified tax structure, complexity persists regarding the applicability of rates, input tax credits, exemptions, and procedural compliance. There is a lack of clarity among developers, contractors, and consumers when it comes to calculating tax liability. This often leads to tax evasion, penalties, or increased costs for home buyers.
This comprehensive guide aims to provide clarity and ensure a uniform understanding of GST provisions affecting the construction industry.
What is a Works Contract in GST on Construction?
A works contract refers to any agreement for the building, construction, fabrication, erection, installation, completion, fitting out, improvement, repair, renovation, alteration, or commissioning of any immovable property.
Works contract under GST construction covers a wide range of activities like:
- Fabrication and installation of metallic structures like plants, factories, transmission towers, stadiums, etc., that have an immovable physical infrastructure.
- Fabrication and erection of non-metallic structures using materials like glass, plastic, rubber, fibers, etc.
- Completion and finishing services like plastering, flooring, painting, etc.
- Fitting out of built spaces like installation of doors, windows, lighting, plumbing, air conditioning, etc.
- Improvement/upgradation/extension of existing buildings or structures.
- Repair and maintenance of buildings, civil structures and equipment.
- Renovation, including retrofitting, replacement, and restoration services.
The structures covered under GST on construction contracts include:
- Apartments and multi-story residential buildings.
- Individual houses, row houses, villas, bungalows, etc.
- Hostels, hotels, resorts, inns, etc.
- Office buildings, malls, shops, commercial complexes.
- Industrial buildings like factories, warehouses, godowns.
- Institutional buildings like schools, colleges, hospitals.
- Road, bridges, dams, and other civil engineering structures.
GST construction is only applicable on under-construction properties. Once the Completion Certificate is obtained from the competent authority after verification, GST will not apply to that property.
Applicability of GST on Construction
As per Schedule II of the CGST Act, the construction of a complex, building, or civil structure meant for sale, either wholly or partly, is specifically defined as a supply of service. However, GST construction will not apply if the full consideration is received after the competent authority issues the completion certificate.
Exemptions from GST Construction
Despite being applicable to construction services in general, GST on construction law provides certain exemptions and lower tax rates on construction services in specific cases:
- Construction services for projects under the Pradhan Mantri Awas Yojana, provided through pure labor contracts without materials are fully exempt from GST construction. This promotes the PM’s affordable housing scheme.
- Construction of affordable residential houses up to 60 sq m carpet area in metro cities and 90 sq m in non-metro areas, and with value not exceeding Rs.45 lakhs, are charged at a concessional 1% GST rate without ITC. This makes such homes more affordable.
- Pure labor contracts for the construction of an individual residential unit are exempt from GST construction, provided no input tax credit is claimed.
- Re-sale of under-construction or ready-to-move-in flats where no input tax credit is availed by the developer/seller is exempt from GST. This reduces taxes on the purchase of constructed property for investment or self-use.
- E-way bills must be issued only for transportation of goods like cement, steel, bricks, etc, associated with construction activity where the consignment value exceeds Rs.50,000. This simplified compliance under GST construction.
Registration Requirement
Businesses involved in the supply of construction services, including contractors, developers, and promoters, are required to register under GST construction and raise tax invoices if their annual turnover exceeds the threshold limit of Rs.20 lakhs (Rs.10 lakhs earlier).
GST Rates for Construction
| Construction Activity | GST Rate | HSN Code |
| Affordable Housing | 1% | 9954 |
| Non-Affordable Housing | 5% | 9954 |
| Commercial Apartments | 12% | 9954 |
| Works Contract (Material Included) | 12% | 9954 |
| Works Contract (Labour Only) | 18% | 9987 |
| Composite Supply (Goods <25%) | 18% | 9954 |
| Composite Supply (Goods >=25%) | 12% | 9954 |
NOTE: *GST rates after 1/3rd reduction for land value. Developers cannot claim ITC on these rates.
GST on Construction Materials
GST on construction is applicable on the purchase of major inputs and building materials used for construction like:
| Material | GST Rates on Construction Services |
| Sand (Natural) | 5% |
| Sand (Bituminous) | 18% |
| Bricks | 5% or 12% |
| Cement | 28% |
| Steel (bars, sheets, structurals) | 18% |
| Stones (marble, granite, stone blocks) | 5% or 12% |
| Flooring tiles | 5% or 12% or 18% |
| Ceramic tiles | 18% |
| Paints and varnishes | 28% |
| Plastic pipes, tubes, fittings | 18% |
| Sanitary ware and fittings | 18% |
| Electrical appliances and fittings | 28% |
ITC Availability on Construction
Input Tax Credit refers to the credit for taxes paid on inputs and input services used for providing taxable output supplies. As per Section 17(5) of the CGST Act, ITC is not available to developers on:
- Expenses incurred for the construction of an immovable property, except for services used in the course of construction or for completing such construction. For example, ITC can be claimed on architect fees, approval charges, construction equipment hire charges, etc.
- Goods or services used exclusively for renovation, repair, or maintenance of a building not intended for further supply.
However, works contractors can claim ITC for the above expenses as they are not the final supplier. The advantage of ITC can be used by them to offer competitive pricing.
Concessional GST Rates on Construction Services
To promote affordable housing and give impetus to the real estate sector, concessional GST on construction rates of 1% and 5% have been introduced on certain construction services. To avail such concessional rates, the following conditions need to be fulfilled:
- No input tax credit can be claimed on inputs or input services, except on cement purchased from unregistered dealers.
- 80% of the inputs and input services (in value terms) should be received from registered dealers. If not, tax on the shortfall amount has to be paid by the developer under Reverse Charge (RCM).
- Cement has to be purchased only from registered dealers. If purchased from unregistered dealers, tax @ 28% under RCM has to be paid in the month of purchase.
- A project-wise account of procurement of inputs/input services from registered and unregistered suppliers needs to be maintained. If the shortfall in procurement from registered dealers exceeds 20%, the developer has to pay GST on construction on the shortfall under RCM. This has to be calculated annually and paid with the final GST return for the fiscal year.
While calculating the total value of inputs/input services, the value of certain services like development rights, lease of land, electricity, high-speed diesel, motor spirit, natural gas, etc, is excluded.
Reverse Charge Mechanism
The Reverse charge (RCM) mechanism under GST requires the recipient to pay tax on certain notified supplies. It applies to the following situations in the case of construction services:
- Shortfall in value of inputs/input services procured from registered suppliers – Tax has to be paid on the shortfall amount by the developer under RCM.
- Purchase of cement from unregistered dealers – 28% GST has to be paid by the developer on cement procured from unregistered dealers
- Purchase of capital goods from unregistered dealers – GST has to be paid by the developer on such capital goods under RCM.
GST Rates Applicable Under RCM
| Supply | RCM Rates |
| Cement from unregistered dealer | 28% (14% CGST + 14% SGST) |
| Other inputs/input services under shortfall | 18% (9% CGST + 9% SGST) |
| Capital goods from unregistered dealer | As applicable |
Conclusion
The GST construction rules and rates for the construction sector aim to provide clarity on the tax implications for all stakeholders and ensure uniform taxation. Proper compliance and understanding of GST provisions is crucial for developers, contractors, and consumers to avoid tax evasion. The government has defined certain exemptions and lower tax rates to boost affordable housing and given certain relaxations for small service providers. Overall, the GST regime attempts to balance revenue considerations and priorities of the construction industry, which is a major contributor to the GDP.
FAQs on GST construction
1. Is GST on construction applicable on ready-to-move properties on which the completion certificate is received?
No, GST is not applicable on ready-to-move-in properties that have received the completion certificate after due verification by the competent authority. GST applies only on under-construction properties which do not have the completion certificate.
2. What is the GST rate for construction of a commercial shop or office space?
Construction of commercial shops or offices would attract GST at a 12% rate after deducting 1/3rd of the deemed value towards the transfer of land. ITC on construction services cannot be claimed in this case.
3. Can a works contractor claim ITC on the construction of a factory shed?
Yes, a works contractor providing services to a factory can claim input tax credit on goods (like cement, steel) and services (like design fees, equipment hire) used for the construction of a factory shed or building.
4. Is GST on construction charged on building materials like steel, cement etc?
Yes, GST at the applicable rates is charged on the purchase of major building materials like steel, cement, bricks, sand, aggregates, tiles, pipes, etc. Rates vary from 5% on basic materials to 28% on processed materials.
5. Is GST applicable if I get minor repair work done for my house through a contractor?
If it is a minor repair or renovation work carried out through a small contractor, he may be below the GST threshold limit, in which case GST may not apply. For turnover above Rs. 20 lakhs, 18% GST will apply to the contractor’s services for house repairs or renovation as a works contract.