What a works contract is under GST
Section 2(119) of the CGST Act 2017 defines a works contract as a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property, where transfer of property in goods (as goods or in some other form) is involved in executing it.
Two conditions have to be met together:
- The result is immovable property: a building, a road, a pipeline laid in the ground, a plant fixed to a foundation so that it cannot be shifted without damage. Supplying and installing movable equipment is not a works contract under this definition, even if it is called one in the agreement.
- Goods pass to the owner in the course of the work: cement, steel, pipes, cables, fittings. A pure labour contract, where the owner supplies all material, is not a works contract; it is a supply of construction services.
Composite supply, treated as a service
A works contract combines goods and services, so in ordinary terms it is a composite supply (s.2(30)). Under the general rule (s.8), a composite supply takes the rate of its principal supply. For works contracts the Act settles the question directly: paragraph 6(a) of Schedule II treats a works contract as defined in s.2(119) as a supply of services. There is no split between a goods part and a labour part, and the whole contract value is taxed as a service under heading 9954 (construction services).
A contract that fails the s.2(119) test, for example supply and installation of a movable machine, is not covered by Schedule II paragraph 6(a), and the ordinary composite or mixed supply rules decide whether goods or services is the principal supply.
Rates after the September 2025 rate rationalisation
The GST Council's 56th meeting (3 September 2025) moved GST to a structure with a standard rate of 18% and a merit rate of 5%. The service rate changes were notified by Notification 15/2025-Central Tax (Rate), amending Notification 11/2017-Central Tax (Rate), with effect from 22 September 2025.
| Works contract | Rate before | Rate now | Change effective |
|---|---|---|---|
| Works contract services not elsewhere covered (residual entry) | 18% with ITC | 18% with ITC | No change |
| Predominantly earth work (more than 75% of the contract value) supplied to Government | 12% with ITC | 18% with ITC | 22 September 2025 |
| Sub-contractor to the main contractor on such earth work for Government | 12% with ITC | 18% with ITC | 22 September 2025 |
| Offshore works contract for oil and gas exploration and production | 12% with ITC | 18% with ITC | 22 September 2025 |
| Works for the Central Government, a State Government, a Union territory or a local authority (canals, dams, pipelines, water and sewage plants, hospitals, schools and similar entries) | 12% with ITC | 18% with ITC | 18 July 2022, by Notification 03/2022-Central Tax (Rate) |
So, for most works contracts, including works for government departments, the rate is now 18% (9% CGST + 9% SGST, or 18% IGST). The 56th meeting's list of construction-sector changes named only the three entries shown above. The older 12% entries for roads, bridges, railways and metro used by the general public, affordable housing and works for Government were omitted from Notification 11/2017-Central Tax (Rate) by Notification 03/2022-Central Tax (Rate) from 18 July 2022, so no works-contract entry of serial 3 stays at 12%. Pure labour contracts are exempt only in the cases listed in Notification 12/2017-Central Tax (Rate): serial 10 (houses under the Housing for All (Urban) Mission or PMAY) and serial 11 (construction or repair of a single residential unit).
Contracts bid before a rate change are taxed at the rate in force at the time of supply, worked out under s.14 of the CGST Act for supplies spanning the change. Whether the owner bears the extra tax depends on the contract's tax clause; CPWD's clause 10C, for example, excludes changes in GST from its statutory-variation payment. Work out the tax on a bill with the GST works contract calculator.
Place of supply
For services directly in relation to immovable property, including works contracts, the place of supply is the location of the immovable property (s.12(3) of the IGST Act 2017 for supplies within India). Where the property lies in more than one State, the value is apportioned between them. The result:
- Contractor registered in the same State as the site: CGST + SGST.
- Contractor registered in another State: IGST, unless the contractor registers in the State of the site and invoices from there. Many contractors with a long project do so, because a site office or store in that State is a place of business under s.2(85) of the CGST Act (which includes a warehouse or godown), and a supplier must register in each State from which it makes taxable supplies.
Input tax credit: who gets it and who does not
The contractor can take credit on cement, steel, other materials, plant hire, sub-contracts and services used in the works contract, subject to the usual conditions. Under s.17(5)(c), works contract services are blocked when supplied for construction of immovable property, except where they are an input service for a further supply of works contract service. So a main contractor can take credit on a sub-contractor's works contract invoice.
The owner generally cannot:
- s.17(5)(c) blocks credit on works contract services for construction of immovable property, other than plant and machinery.
- s.17(5)(d) blocks credit on goods and services received for construction of immovable property, other than plant and machinery, on the taxpayer's own account, even when the property is used in business.
- "Construction" includes reconstruction, renovation, additions, alterations and repairs, to the extent they are capitalised.
After the Supreme Court's decision in Safari Retreats (October 2024) on the words "plant or machinery", the Finance Act 2025 amended s.17(5)(d) to read "plant and machinery", with retrospective effect from 1 July 2017. The exception now turns on the definition of plant and machinery in the explanation to s.17: apparatus, equipment and machinery fixed to earth by foundation or structural support, excluding land, buildings and other civil structures. A factory shed or office building is blocked; a foundation built for a machine is part of plant and machinery.
GST TDS on government contracts: s.51
When the buyer is a department or establishment of the Central or a State Government, a local authority, a governmental agency, or a person notified under s.51 (including bodies set up by government with 51% or more of their equity or control, government societies and public sector undertakings, by Notification 50/2018-Central Tax), it deducts 2% of the taxable value (1% CGST + 1% SGST, or 2% IGST) from payments where the total value of supply under the contract exceeds ₹2.5 lakh, excluding tax.
- No deduction is made where the supplier's location and the place of supply are in a State or Union territory different from the buyer's State of registration.
- The deductor files GSTR-7 and pays by the 10th of the following month.
- The contractor accepts the amount on the GST portal and it is credited to the electronic cash ledger, where it can pay GST.
See the separate guide on GST TDS for government contractors for reconciliation.
Worked example
Illustrative figures. ABC Infra Private Limited, registered in the same State as the site, has a ₹1 crore contract to build a school block for a State Government department. An RA bill shows work done of ₹20,00,000.
| Line | ₹ |
|---|---|
| Taxable value of the bill | 20,00,000 |
| CGST at 9% | 1,80,000 |
| SGST at 9% | 1,80,000 |
| Invoice value | 23,60,000 |
| GST TDS at 2% of taxable value (1% CGST + 1% SGST) | 40,000 |
| Income-tax TDS at 2% under s.393 [194C], on value before GST | 40,000 |
Suppose the contractor's eligible input tax credit for the month on cement, steel, hire and sub-contracts is ₹2,40,000. Output tax ₹3,60,000 less ITC ₹2,40,000 leaves ₹1,20,000, of which ₹40,000 is met from the GST TDS credit in the cash ledger once accepted, and ₹80,000 is paid in cash. The department cannot take credit on the ₹3,60,000: the school block is immovable property and the credit is blocked by s.17(5)(c). Other deductions, such as security deposit and labour cess, are covered in the RA bill deductions calculator.
Invoicing points
- A works contract paid by RA bills is usually a continuous supply of services. Where payment is linked to an event, such as completion of a stage or certification of a bill, the invoice is due on or before that event (s.31(5)).
- Show the SAC (9954), the place of supply and, on government bills, enough detail for the deductor to file GSTR-7 correctly.
- Advances received, such as mobilisation advance, can raise a GST liability on receipt for services; check the treatment with your CA.
K-Finance is where the bills raised from K-Projects are accounted for. For the income-tax side, see TDS on contractor and professional payments.
Common questions
What is the GST rate on works contracts now?
18% (9% CGST + 9% SGST, or 18% IGST) for most works contracts. From 22 September 2025 the remaining 12% entries for earth work for Government, its sub-contracts and offshore oil and gas works moved to 18%. Check the current text of Notification 11/2017-Central Tax (Rate) for any other concessional entry that may fit your contract.
Is a works contract a supply of goods or services?
Services. Paragraph 6(a) of Schedule II to the CGST Act treats a works contract as defined in s.2(119) as a supply of services, so the whole value is taxed under heading 9954 without splitting goods and labour.
Can a company claim ITC on GST paid for constructing its office or factory building?
Generally no. Section 17(5)(c) and (d) block credit on works contracts and on goods and services for construction of immovable property on own account, except for plant and machinery. A building or shed is not plant and machinery.
Can a contractor take ITC on a sub-contractor's works contract bill?
Yes. Section 17(5)(c) does not block works contract services used as an input service for a further supply of works contract service.
When does a government department deduct GST TDS from a contractor?
Under s.51 of the CGST Act, when the total value of supply under the contract exceeds ₹2.5 lakh, excluding tax. It deducts 2% of the taxable value and the contractor gets credit in the electronic cash ledger.
What is the place of supply for a works contract?
The location of the immovable property, under s.12(3) of the IGST Act. If the contractor's registration is in the same State as the site, CGST and SGST apply; otherwise IGST.
Sources
- CBIC: Notification 03/2022-Central Tax (Rate) dated 13 July 2022 (omits items (iii) to (vi) and (ix) of serial 3)
- CBIC: Notification 12/2017-Central Tax (Rate), serials 10 and 11 (pure labour contracts)
- GST Council: 56th meeting press release (works-contract rates from 22 September 2025)
- CGST Act 2017, ss.2(30), 2(119), 8, 17(5), 31, 51 and Schedule II (CBIC)
- CBIC GST rates for goods and services (Notification 11/2017-Central Tax (Rate) as amended, incl. 03/2022 and 15/2025)
- Recommendations of the 56th meeting of the GST Council, 3 September 2025 (press release)
- IGST Act 2017, s.12(3) and CBIC acts page