Understanding GST Implications for Construction Services and Materials
The Goods and Services Tax (GST) has simplified the taxation framework for construction contracts in India by replacing multiple older taxes. This article details the applicability of GST to various construction activities, distinguishing between under-construction and ready-to-move properties, and highlights specific exemptions for affordable housing and labor contracts. It also provides comprehensive tables for GST rates and HSN codes for construction services and materials. Furthermore, the content clarifies the rules regarding Input Tax Credit (ITC) for construction expenses, including recent Supreme Court clarifications.
Since the Goods and Services Tax (GST) was implemented, the taxation of construction contracts has become more streamlined. Previously, construction services were subject to multiple taxes, such as service tax, excise duty, and VAT. The introduction of GST eliminated these older taxes, simplifying the system for construction work. This article explains the key aspects of GST concerning construction.
The Central Board of Indirect Taxes and Customs (CBIC) announced specific GST rate adjustments for the construction sector, effective from September 22, 2025. These include:
- Offshore works contracts for oil and gas exploration/production, with GST changing from 12% (with ITC) to 18% (with ITC).
- Works contracts for government projects involving over 75% earthwork, with GST adjusting from 12% (with ITC) to 18% (with ITC).
- Subcontractor works contracts for main contractors on government earthwork projects, with GST moving from 12% (with ITC) to 18% (with ITC).
- Sand-lime bricks and stone inlay work, where GST was reduced from 12% to 5%.
GST Application to Construction Projects
In India, GST applies to various construction activities, including private, commercial, and multi-unit residential construction. Any property under construction intended for sale is classified as a supply of service and is thus subject to GST. Conversely, completed properties ready for sale do not incur GST. Only properties still under construction are liable for GST. However, the exact application of GST on construction depends on several elements, such as the construction type, transaction nature, and the status of the involved parties.
According to paragraph (5b) of Schedule II of the CGST Act, construction of a complex, building, civil structure, or a portion thereof intended for sale, either wholly or in part, is defined as a supply of services. Nevertheless, if the full payment is received after the completion certificate has been issued, it is not considered a supply of services and is therefore exempt from GST. This means GST is only relevant for properties still being built.
The GST law provides certain exemptions and concessions for the construction sector:
- Construction work for affordable housing projects is subject to a reduced GST rate of 1%. Affordable housing refers to residential properties with a carpet area up to 60 square meters in metropolitan areas or up to 90 square meters in non-metropolitan areas, provided their value is Rs. 45 lakhs or less.
- GST is not applicable to property resales, the buying and selling of apartments for residential use, or the purchase and sale of land.
- Construction and enhancement services provided through pure labor contracts under the Pradhan Mantri Awas Yojana (PMAY) are exempt from GST.
- Pure labor contracts for constructing a single residential unit or part of a residential complex are also exempt from GST.
e-Way bills are necessary for transporting building materials such as cement and steel only when the consignment value exceeds Rs.50,000.
Businesses providing construction services must issue invoices if they are registered under GST.
GST Rates and HSN Codes for Construction Services
The following table outlines the GST rates and HSN codes for various construction activities in India:
| Construction Activity | Total GST Rate | HSN Code |
|---|---|---|
| Affordable housing apartment construction (projects starting on or after April 1, 2019) | 1%* | 9954 |
| Non-affordable housing apartment construction (projects starting on or after April 1, 2019) | 5%* | 9954 |
| Construction of commercial apartments in REP (excluding RREP) | 12%* | 9954 |
| Works contract services (contractor supplies material) | 12% | 9954 |
| Composite works contracts for offshore oil/gas exploration and production | 18% with ITC^ | 9954 |
| Composite earthwork contracts (75%+ value) for Government | 18% with ITC^ | 9954 |
| Composite works contracts by subcontractors for Government | 18% with ITC^ | 9954 |
| Works contract services (contractor supplies only labor) | 18% | 9987 |
| Composite supply of works contract and goods (goods value < 25% of total contract) | 18% | 9954 |
| Composite supply of works contract and goods (goods value >= 25% of total contract) | 12% | 9954 |
*After reducing 1/3rd towards land component from 1.5%, 7.5%, and 18%. ^GST rate has been revised from 12% to 5% effective September 22, 2025, for certain items. Specific conditions must be met to benefit from these schemes.
GST on Construction Materials
The GST rates for construction materials vary depending on the item:
| Material | GST Rates |
|---|---|
| Sand | * Oil shale/bituminous, asphaltic rocks, natural asphaltites, tar sand, asphalt: 18% * Natural sand: 5% |
| Mica | 12% |
| Brick | 5% - 28% |
| Sand lime bricks and stone inlay work | 5%^ |
| Cement | 28% |
| Portland cement and similar hydraulic cements | 18%^ |
| Crushed stones, pebbles, gravel | 5% |
| Granite and marble | * Blocks: 12% * Not in blocks: 28% |
| Steel and Iron | 18% |
| Building stones | 5% |
| Tiles | 5% - 28% |
| Coal | 5% |
| Wallpaper | 28% |
| Varnish and Paint | 28% |
| Bathroom interiors and appliances | * Pipes and tubes, fittings: 18% * Other items: 28% |
| Electrical Appliances | 28% |
^GST rate on sand lime brick (from 12% to 5%) and Portland cement (from 28% to 18%) is effective from September 22, 2025.
Input Tax Credit (ITC) on GST Paid for Construction
Under clauses (c) and (d) of section 17(5) of the CGST Act, Input Tax Credit (ITC) is not available in the following scenarios:
- Expenses incurred on works contract services for constructing immovable property are not eligible for ITC, except for input services used to complete the supply of works contract services or for the construction of plants and machinery.
- ITC cannot be claimed for expenses related to the renovation or repair of property.
It is important to note that construction companies, builders, and promoters are generally eligible to claim ITC for the above-mentioned expenses. An update from October 3, 2024, clarifies a Supreme Court ruling: GST input tax credit can be claimed on construction for rental services used for commercial purposes. The highest court determined that if a building's construction is essential for providing services such as leasing or renting for commercial activity, it may qualify under the 'plant' exception to Section 17(5)(d) of the CGST Act. This section typically restricts ITC claims on construction materials for immovable property, with an exception for plant and machinery.
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