GST on government works contracts — what contractors get wrong
GST on a works contract is a double-digit percentage of every bill you raise. Get one thing wrong about it at the pricing stage and it is not a rounding error — it is the whole of your margin, and then some.
This guide is about what GST changes for a contractor bidding on government work. It is not a substitute for a chartered accountant, and on the rate itself in particular you should take their word over anything written here.
The mistake that costs the most: inclusive or exclusive
Before anything else, find out whether the rates you are quoting include GST or not.
The tender says so — in the NIT, in the instructions to bidders, or at the head of the bill of quantities or price schedule. Look for words like "inclusive of all taxes including GST", or "GST will be paid extra at the applicable rate".
If you quote a rate you believed was exclusive, and the document says inclusive, the GST comes out of your price. On a ₹50 lakh job, that is several lakh you had counted as yours. Read that line before you read anything else in the price schedule.
A works contract is a service — and why that matters
GST law defines a works contract narrowly. Under Section 2(119) of the CGST Act it is a contract for building, construction, fabrication, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of immovable property, where goods pass to the client in the course of the work.
Schedule II treats it as a supply of services, not a sale of goods plus labour. So the bricks, steel and cement that go into the work are not taxed separately at their own rates: the whole contract is one service, taxed at the works contract rate.
Two consequences for a contractor:
- Repair or fabrication of something movable — a vehicle body, a machine in a workshop — is not a works contract under GST, even if it feels like one. It is taxed differently.
- You cannot split a works contract bill into "material" and "labour" to tax them apart.
Why this guide does not print the rate
Because it changes, and it depends on the job.
The rate on a works contract is set by notification — No. 11/2017-Central Tax (Rate), as amended — and it turns on what the work is and who it is for: the kind of structure, whether the client is a government, a local authority or a government entity, and what the work is used for. The entries have been changed several times since 2017, and a rate quoted in an article is the rate on the day that article was written.
So for every tender:
- Confirm the rate for that work and that client with your CA, against the current notification.
- Check which rate the department's own estimate assumed. If the estimate was prepared before a rate change, the estimated cost you are quoting against may not include what you will actually have to charge.
The department will deduct 2% from your bills
This surprises new contractors every year. Section 51 of the CGST Act requires government departments, local authorities and governmental agencies to deduct tax at source from what they pay you:
- 1% under the CGST Act and 1% under the state Act — 2% in all — of the value of the supply.
- It applies where the total value of supply under a contract exceeds ₹2,50,000.
- The value is taken excluding the GST shown on your invoice. So on a ₹10 lakh bill plus GST, the deduction is 2% of ₹10 lakh.
Three things to know about it:
- It is not a cost; it is your tax, paid early. The deducted amount is credited to your electronic cash ledger once it shows in the department's return, and you use it against your own GST liability.
- It is a cash-flow cost. You receive 98% of the bill's value now and the rest as a credit later. On a long contract with slow payments, plan for that.
- Check it arrived. If the department deducted it and never filed its return, the credit will not show in your ledger. Reconcile every deduction on your payment advice against the GST portal.
There is one exception written into the section: no deduction is made where your location and the place of supply are in a state or UT different from the one the department is registered in.
Input tax credit: what you can and cannot claim
Normally a business can set off the GST it pays on its purchases against the GST it charges. On works contracts that is restricted, and the restriction runs in a direction that helps contractors and hurts their clients.
Section 17(5)(c) blocks input tax credit on works contract services used for construction of immovable property (other than plant and machinery) — except where the service is an input for a further supply of works contract service.
In practice:
- You can claim credit for GST your sub-contractor charges you on part of the work, because you are using it to supply a works contract yourself.
- You can claim credit on the materials and services you buy to execute the contract, subject to the ordinary conditions.
- A private company paying you to put up its office building usually cannot claim credit for the GST you charge it. That is its problem rather than yours — but it is why some private clients push hard on GST in negotiation.
Build that credit into your pricing. GST you will get back on inputs is not a cost of the job, and a contractor who prices as if it were is quoting high.
Your GST registration is an eligibility document
Almost every tender asks for a GST registration certificate. Two things catch bidders out:
- It must be the bidder's own. The registration has to belong to the entity that is bidding — the same PAN as on your enlistment and your DSC. A firm uploading a partner's, a director's or a sister concern's registration because "it is the same business" is offering someone else's registration, and the technical evaluation will treat it that way.
- Some tenders ask for registration in the state where the work is. Read the eligibility clause; do not assume your home-state registration is enough.
More on documents that sink a bid before its price is opened is in why bids get rejected.
Keep separate accounts for every works contract
Rule 56(14) of the CGST Rules requires anyone executing a works contract to keep separate accounts for each contract, showing:
- the name and address of the person you are doing the work for;
- the goods and services you received for it, with description, value and quantity;
- the goods and services you actually used in it;
- the payments received against it; and
- the names and addresses of your suppliers.
This is not optional bookkeeping. It is the record you will need when a TDS credit does not reconcile, when a department queries your invoice, or when your input credit is questioned.
When the rate changes during the contract
A GST rate can change between the day you quote and the day you finish. Who bears the difference depends on the contract, not on fairness. Many government contracts carry a clause for statutory variation in taxes, which lets the price move with a change in the law; some do not.
Find that clause before you bid. If it is missing, you are carrying the risk of a rate change on every bill you have not yet raised.
And the standing rule for everything here: the tender document you are bidding on governs, and on tax questions your CA's advice governs over any general guide.