In short: GST on free issue material turns on a single test in section 15(2)(b) of the CGST Act — was you, the contractor, liable to pay for that material, with the client having met your liability instead? If the tender priced your item for execution only and the department was always going to supply the cement and steel, no liability of yours was discharged and nothing is added to your value. If the contract made the material your responsibility, the answer changes.

On a large government job the department often supplies the main material itself. Cement, steel, sometimes bitumen, drawn from its own stores against an issue register. You bring plant, labour and everything else, and your rate covers execution. Then an officer looks at the job, sees ₹80 lakh of steel standing in a structure you built, and asks why your invoice shows ₹30 lakh.

The one provision that decides GST on free issue material

Section 15(2)(b) of the CGST Act, 2017 says the value of supply shall include:

“any amount that the supplier is liable to pay in relation to such supply but which has been incurred by the recipient of the supply and not included in the price actually paid or payable for the goods or services or both”

Take it apart, because the order of the words is the whole answer.

First, there has to be an amount the supplier is liable to pay. That is you. Not an amount someone had to pay for the project — an amount you were on the hook for.

Second, the recipient incurred it. The client spent the money instead.

Third, it is not already in the price. If your rate already carried it, there is nothing to add.

All three have to be true. Genuine free issue usually fails the first one, and that is why it usually stays out of your value.

Where your liability actually comes from

Not from the tax law. From the tender.

Look at the schedule item and the scope of work together. A line reading “providing and laying” at a full supply-and-fix rate puts the material squarely on you. A line reading “laying of departmental cement concrete” at a labour-and-execution rate does not — the department kept that obligation, priced your item accordingly, and never transferred the liability at all.

This is why the answer cannot be given as a flat yes or no, and why two contractors on the same road package can be in different positions. The form of the tender decides it, which is another reason to read the bid form before the bill of quantities — the same discipline that separates an item rate tender from a percentage rate tender.

The three situations, side by side

Arrangement Who was liable Effect on your taxable value
Department issues material free; your rate is execution only The department, throughout Nothing added — no liability of yours was met
Your rate is supply-and-fix; department issues material free anyway You, under the contract Arguable addition under section 15(2)(b) — take advice
Department issues material and recovers the cost from your bills You, paying by deduction Not free issue at all; value follows the recovery

The middle row is where assessments happen. If your tender priced the item as a complete supply and the department then handed you the material without recovery, an officer has a real argument that your liability was discharged by the recipient. That is a question for your tax adviser on your own document, not a position to take by reflex.

Recovery changes everything

Plenty of tenders that use the words “free issue” are not free at all. The department issues the material and recovers a stated rate per bag or per tonne from your running bills, often with a penalty rate for consumption above the theoretical figure.

When that happens the clause is a supply to you, paid for by deduction from your certified value. The label does not control the treatment. Check the recovery rate and the wastage allowance in the tender before you price, because a penal recovery rate on excess consumption can quietly remove the margin you built into the item — the same way an unnoticed deduction does on retention money.

Keep the file that answers the question

Three documents settle this in a meeting instead of an appeal: the tender clause dealing with departmental material, the scope of work for the items concerned, and the material issue register with quantities and dates. Keep them together from day one of the job rather than assembling them two years later.

Remember also that free issue does not touch your own credit chain. You claim credit on what you actually buy — diesel, hire charges, consumables, subcontract bills. The tax on material the department bought is the department’s business. The broader credit position on plant and equipment sits in GST input credit on construction equipment, and the deduction the client makes from your bill under the works contract rules in GST TDS on works contracts.

The bottom line

Do not answer this from the word “free”. Answer it from the scope of work. If the contract never made the material your responsibility, section 15(2)(b) has nothing to bite on and your value stays where your rate put it. If your rate was written as a full supply and the material came to you anyway, get advice before the assessment rather than after. And if there is a recovery clause, price it as a cost, because that is what it is.

Pricing a package where the department issues the main material? Check the clause in live construction tenders before you bid, and if the job needs a machine you do not yet own, compare equipment finance options while the rate is still being built.

Tax positions, rates, recovery terms and tender clauses change, and the treatment of departmental material turns on your own contract wording. Confirm the current position with your tax adviser, the client department or an official source before deciding. Figures above are indicative.