GST on works contract turns on a definition before it turns on a rate. Section 2(119) of the CGST Act calls something a works contract only when the work relates to immovable property and goods actually pass from you to the client in executing it. Supply only labour and it is not a works contract at all. Section 17(5) then decides who keeps the input credit: it is blocked for construction of immovable property, but stays available where the service is an input for further supply of works contract service, and plant and machinery is carved out of the block entirely.

Ask ten contractors what a works contract is and most will describe the billing, not the test. It is the job where GST is charged on the whole value including material, they will say, and that is true as a consequence. It is not the rule.

The rule matters because it decides three things on the same invoice: how the supply is classified, whether your client can take credit for what you charge, and whether you can take credit for what your suppliers charge you. Getting it wrong is rarely caught in the month it happens.

GST on works contract starts with a two-part test

The Act defines it in a single sentence. A works contract means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract.

Two conditions, both required.

The first is immovable property. A long list of activities is named, but every one of them has to be done to immovable property. Fabricating a structure in your yard and selling it is a supply of goods. Erecting that structure into a building on site is capable of being a works contract.

The second is that goods must pass. The words “whether as goods or in some other form” cover the ordinary case where cement and steel stop being cement and steel once they are in a slab. What they do not cover is a contract where nothing of yours is consumed into the work.

With material versus labour only

This is where the definition earns its keep, and it is the split most contractors are actually asking about.

How the job is structured Do goods pass from you? Works contract under 2(119)?
You supply material and labour, build into the site Yes Yes, both limbs met
Client issues all material free, you supply only labour and supervision No No, second limb fails
You supply consumables only, client supplies the main material Depends on what is consumed into the work Judgement call, document it
You fabricate off site and deliver, someone else erects Yes, but to movable property No, first limb fails

The middle row is the one that generates disputes. Free-issue material does not become yours, so it does not transfer from you, and a contract where the client issues everything is a pure labour supply however much of the site you are running. The treatment of client-issued material on your own billing is a subject in itself, covered in our note on GST on free issue material.

Write the split into the work order rather than deciding it at invoicing. A contract that says “supply and erection” and a contract that says “erection charges” against the same physical work are not the same supply, and the paperwork is what an officer reads two years later.

Where the input credit actually goes

Section 17(5) lists what input tax credit is blocked on, and two of its clauses do most of the damage to construction.

Clause (c) blocks credit on works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service.

Clause (d) blocks credit on goods or services received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account, including where they are used in the course or furtherance of business.

Put together, the logic is that GST should not be recovered on building the building. But the exception inside clause (c) is what keeps the contracting chain working, and it is narrower than people assume.

A sub-contractor charges a main contractor. The main contractor is buying a works contract service in order to supply a works contract service onward to the client. That is an input service for further supply of works contract service, and the credit survives. The chain can run several layers deep and the exception holds at each layer, provided each layer really is supplying a works contract onward.

The client at the end of that chain is usually where it stops. A factory owner having a shed built is constructing immovable property on his own account, clause (d) applies, and the GST you charge is a cost to him rather than a credit. That is worth knowing before you are asked to explain your quote.

The plant and machinery carve-out

Both clauses say “other than plant and machinery”, and for anyone who owns or erects equipment that exclusion is the most valuable line in the section.

The Act defines the expression: apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services, and includes such foundation and structural supports, but excludes land, building or any other civil structures, telecommunication towers, and pipelines laid outside the factory premises.

Read the inclusion and the exclusion together. The foundation under a crusher or a batching plant is inside the definition and therefore outside the credit block. The civil structure around it is not. On a job that involves both, the split between the machine foundation and the shed is a real division with a real tax consequence, and it should appear in the contract and the measurement rather than being settled later.

The capitalisation line that catches repairs

The Explanation to clauses (c) and (d) says that for those clauses, construction includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property.

Those last four words do a lot of work. Repair spend charged to the profit and loss account is not construction for this purpose. The same spend capitalised into the asset is. The accounting decision therefore drives the credit position, which means your accountant’s treatment and your GST position have to be taken together rather than in separate months.

A related trap sits next door in the same section: where depreciation has been claimed on the tax component of the cost of capital goods under the Income-tax Act, credit on that tax component is not allowed. You choose one benefit, not both.

Why this article does not print a rate

Search results for this topic are full of confident percentages, many of them out of date, some of them describing a period that has ended.

The reason is structural. The rate on a works contract is not in the CGST Act at all. It sits in a rate notification, it varies by the nature of the work and by who the recipient is, and it has been amended more than once. A number that was right for a government contract in one year has been wrong for the same contract since.

So the honest answer is the one a bid actually needs: get the current rate and the SAC classification for your specific scope confirmed before you price, because an out-of-date rate carried into a tender is absorbed by you, not by the client. What does not move month to month is everything above: the definition, the credit block, and the exceptions. Price the contract on the structure and confirm the number separately.

The deduction your client makes from the bill is a different thing again, and is covered in GST TDS on works contract. If your turnover is near the registration threshold, see the GST registration limit for contractors, and if you are weighing the composition route, the composition scheme for contractors sets out what you give up.

The bottom line

Settle the classification in the work order, not the invoice. Ask whether the work is to immovable property and whether anything of yours passes into it, because those two answers decide everything downstream. Then look at who in the chain is finally consuming the construction, because that is the point where the credit stops and somebody absorbs the tax.

If the job needs machines as well as clearing the tax position, equipment finance and the live work on our opportunities page are the next two stops.

Rates, schemes, specifications and prices change, and tax provisions are amended and interpreted differently across states. Confirm the current rate, classification and credit position for your own contract with a tax adviser or an official source before deciding.