Published 18 October 2026
A contractor who builds, installs or repairs something fixed to the earth supplies both materials and labour, usually under one price. Under the old taxes that price was split between VAT and service tax, and the split was argued over for decades. GST settles the classification by statute. What remains difficult is the rate, which has changed three times for government work since 2017. Credit at the customer’s end is blocked, and a judgment on that block was overtaken by a retrospective amendment in 2025. Payment from a government department brings deduction of tax at source.
This guide explains each of those as they stand on 18 October 2026. Real estate developers building for sale are covered in GST for Real Estate Developers.
What counts as a works contract
Section 2(119) 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 wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract.
Two elements are needed: the work is on immovable property, and property in goods passes in carrying it out. A painting contract for a building where the contractor supplies the paint is a works contract. A contract to paint movable machinery is not. Nor is a labour-only contract on a building, which is a plain supply of services.
Paragraph 6(a) of Schedule II treats a works contract as a supply of services. That removes it from the general rule for composite supplies. Under section 8, a composite supply (defined in section 2(30)) is “treated as a supply of such principal supply”. Without paragraph 6(a), a contract dominated by materials might be taxed as goods. With it, every works contract on immovable property is a service, whatever the ratio of goods to labour. A composite contract for movable property, such as fabricating and supplying a machine at the contractor’s works, falls back on section 8, and its principal supply decides its classification. The general scheme of Schedule II is in Supply: the Taxable Event.
The rate: entry 3 of Notification 11/2017, as it stands now
Construction services are at serial number 3 of Notification No. 11/2017-Central Tax (Rate). The items left for works contracts, after the omissions of 2022 and the substitutions of 2025, are these (central tax; total GST in brackets):
| Item | Supply | Rate from 22 September 2025 |
|---|---|---|
| (vii) | Works contract “involving predominantly earth work (that is, constituting more than 75 per cent. of the value of the works contract)” to the Central Government, a State Government, a Union territory or a local authority | 9 per cent (18 per cent) |
| (viii) | Works contract and associated services for offshore oil and gas exploration and production beyond 12 nautical miles | 9 per cent (18 per cent) |
| (x) | Works contract by a sub-contractor to a main contractor supplying item (vii) | 9 per cent (18 per cent) |
| (xi) | House-keeping services such as plumbing and carpentry supplied through an electronic commerce operator by a person not liable to register | 2.5 per cent (5 per cent), without credit |
| (xii) | Construction services other than the items above | 9 per cent (18 per cent) |
Notification No. 15/2025-Central Tax (Rate) made the 2025 change. It substituted “9” for the earlier rate against items (vii), (viii) and (x) with effect from 22 September 2025. Before that date those three items were at 6 per cent central tax, 12 per cent in all. Since then, almost all works contracts are at the standard 18 per cent.
How government and infrastructure work lost its concessions
The concessional rates have changed three times since they were introduced.
- 2017. Notifications No. 20/2017 and 24/2017-Central Tax (Rate) introduced 12 per cent rates (items (iii) to (vi)). Items (iii) and (vi) covered works for government bodies: canals, dams, irrigation, water and sewerage works, monuments, and civil structures not meant for commerce or industry. Items (iv) and (v) covered named kinds of work for any recipient: roads, bridges and tunnels for public use, housing under Pradhan Mantri Awas Yojana and similar schemes, original works for railways “excluding monorail and metro”, single residential units and low-cost houses. Earth work went to 5 per cent (item (vii)), by Notification No. 31/2017. Notification No. 1/2018 added 12 per cent for sub-contractors to main contractors on such work (item (ix)) and 5 per cent for sub-contracts of earth work (item (x)). Notification 31/2017 extended the government items to a “Governmental Authority or a Government Entity”.
- 1 January 2022. Notification No. 22/2021-Central Tax (Rate) cut the recipients back to “the Central Government, State Government, Union territory or a local authority”. Governmental authorities and government entities lost the concession.
- 18 July 2022. Notification No. 03/2022-Central Tax (Rate) omitted items (iii), (iv), (v), (va), (vi) and (ix) altogether, so that work went to 18 per cent. It also raised earth work and its sub-contracts (items (vii) and (x)) from 5 to 12 per cent.
- 22 September 2025. Notification 15/2025 moved items (vii), (viii) and (x) to 18 per cent.
A contract running across one of these dates is taxed under section 14. The old or new rate depends on when the work was done, the invoice issued and the payment received (see Time of Supply).
What is still exempt
Notification No. 12/2017-Central Tax (Rate) exempts two kinds of supply to the Central Government, a State Government, a Union territory or a local authority, where the work relates to a function entrusted to a Panchayat under article 243G or a Municipality under article 243W:
- Entry 3: pure services, “excluding works contract service or other composite supplies involving supply of any goods”.
- Entry 3A: composite supplies “in which the value of supply of goods constitutes not more than 25 per cent.” of the value.
Notification No. 16/2021-Central Tax (Rate) omitted the words “or a Governmental authority or a Government Entity” from both entries. A works contract with goods above 25 per cent of value is taxable, even for a municipal function.
Credit at the customer’s end: section 17(5)© and (d)
The contractor takes credit on its own inputs in the ordinary way. The block falls on the customer. Section 17(5) denies 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”;
- (d) goods or services “received by a taxable person for construction of an immovable property (other than plant and machinery) on his own account”, even if used in business.
“Construction” includes renovation, additions, alterations and repairs “to the extent of capitalisation”. “Plant and machinery” means apparatus, equipment and machinery fixed to earth by foundation or structural support and used for making outward supplies. It includes the foundation and supports. It excludes land, buildings and other civil structures, telecommunication towers, and pipelines laid outside the factory premises.
A main contractor buying a sub-contractor’s works contract to supply its own works contract can take the credit under the exception in clause ©. A factory owner paying for a new shed cannot, because the shed is a building, not plant and machinery.
Safari Retreats and the 2025 amendment. In Chief Commissioner of Central Goods and Service Tax v. Safari Retreats Private Limited (Supreme Court, 3 October 2024, Civil Appeal No. 2948 of 2023), the respondent had built a shopping mall to let out. It had accumulated more than Rs 34 crore of credit on materials and services, and wished to use it against the GST on rent. The Court upheld clauses © and (d). It held, however, that “plant or machinery”, the words then in clause (d), “cannot be given the same meaning as the expression ‘plant and machinery’ defined by the explanation”. Whether a mall or warehouse was a “plant” was a factual question, to be decided by a “functionality test”. The case was remitted to the Orissa High Court.
Section 124 of the Finance Act, 2025 replaced “plant or machinery” in clause (d) with “plant and machinery”, “deemed to have been substituted with effect from the 1st day of July, 2017”. It added an Explanation 2: any reference to “plant or machinery” “shall always be deemed to have been construed as a reference to ‘plant and machinery’”, “notwithstanding anything to the contrary contained in any judgment”. Notification No. 16/2025-Central Tax brought section 124 into force on 1 October 2025.
The functionality test therefore no longer opens clause (d) for buildings. High Court orders since then, and the open question of the amendment’s retrospective reach, are discussed in Blocked Credits. Clause © always said “plant and machinery”, so Safari Retreats did not widen it.
Deduction at source on government contracts
Section 51 requires government departments, local authorities, governmental agencies and notified persons to deduct tax “at the rate of one per cent.” The deduction is made from payments to a supplier of taxable goods or services “where the total value of such supply, under a contract, exceeds two lakh and fifty thousand rupees”. The value excludes the tax shown on the invoice. One per cent central and one per cent State tax makes two per cent within a State. For inter-State supplies, the IGST Act applies the provision at two per cent. No deduction is made where the supplier’s location and the place of supply are in a State other than the recipient’s State of registration. The persons notified under clause (d) are listed in Notifications No. 33/2017-Central Tax and 50/2018-Central Tax.
The deductor files GSTR-7 (TDS and TCS Returns). The contractor accepts the credit on the portal, and it then reaches its cash ledger. That procedure is in TDS and TCS in Practice. Registration of deductors is in Registering as a Tax Deductor.
What to have ready
| Item | Where it comes from |
|---|---|
| The contract, with scope, the immovable property concerned and whether goods pass | Contract file |
| Recipient’s status (department, local authority, governmental authority, company) | Contract, recipient’s registration |
| For earth work, the share of earth work in contract value | Bill of quantities |
| For exemption claims, the article 243G or 243W function and the value of goods supplied | Contract, work order, bills |
| Running bills, dates of work, invoices and receipts across rate-change dates | Books |
| TDS certificates and the TDS/TCS credit received on the portal | Portal |
Consequences, and what can be put right
A contractor who applies a concessional rate no longer in force, or to a recipient no longer covered, has short-paid tax. The difference is recoverable under section 73 or section 74 for periods up to 2023-24, and section 74A from 2024-25, with interest under section 50. A customer that takes credit blocked by section 17(5)© or (d) must reverse it in GSTR-3B table 4(B)(1) (Reporting Credit in GSTR-3B). Interest runs from the date of utilisation. A wrong rate on an invoice is corrected by a credit or debit note under section 34, within that section’s time limit. Errors already returned are corrected as in Correcting Mistakes in Returns.
The steps, in order
- Decide whether the contract is a works contract: immovable property, and property in goods passing.
- If it is not, classify it as a pure service or as a composite supply under section 8.
- Check exemption entries 3 and 3A of Notification 12/2017 where the recipient is a government or local authority and the work serves a Panchayat or Municipality function.
- Otherwise apply serial number 3 of Notification 11/2017. Since 22 September 2025 this is 18 per cent for almost all works contracts, including government earth work and its sub-contracts.
- Apply section 14 to bills that straddle a rate change.
- Where the recipient is a deductor and the contract exceeds Rs 2.5 lakh, expect two per cent TDS, and accept the credit on the portal.
- On the customer’s side, test each payment against section 17(5)© and (d), as amended in 2025, before taking credit.
The next guide in this set, Goods Transport Agencies, explains how GST on road freight booked through a GTA is paid.