GST on Government Contracts

Introduction

Contractors working on government-awarded projects face unique GST challenges. Whether it’s civil construction for state or central government, PPP infrastructure, or repair works, the tax rate, Input Tax Credit (ITC), and invoicing norms can vary significantly. This guide gives you clarity on SAC codes, current GST rates, ITC eligibility, and how to structure your contracts.

Background: Why This Is Important

Government projects broadly fall into two categories: pure services and works contracts. For pure services, rates may vary based on the type of authority (local body vs PSU vs Govt Dept). Works contracts typically involve the supply of goods + services, making SAC classification and compliance crucial. The recent GST regime changes (Notification 03/2022, etc.) have made 18% the default rate for many such contracts.

GST Rates & SAC Code Table

Contract Type	SAC Code	GST Rate	Notes
Govt Administrative / Local Authority Services	9983 / 9985	18%	No goods supply, service-only work.
Panchayat / Municipality Works (Article 243G / 243W)	9983 / 9985	12%	Local body services under specific notification.
Works Contract (Civil / Infrastructure) for Govt	9954	18%	Includes road, building, pipeline projects.
Public Benefit Construction (Non-Commercial Govt)	9954	12%	When structure is non-commercial and govt-funded.
Road / Water Project Construction	9954	12%	Concessional notification-based rate.
Sub-Contractor to Main Contractor (Govt Contract)	9954	18%	Matches the main contractor’s rate.
Repair / Maintenance of Govt Buildings	9954 / 9987	18%	Standard rate for maintenance / repair services (verify annually for updates).

ITC (Input Tax Credit) Guidelines

ITC is generally allowed for materials and services used in government works contracts.
No ITC if the works contract is used for your *own* construction of immovable property.
Maintain detailed invoices, work orders, measurement books, and proof of supply.
Ensure vendor invoices reflect the correct SAC code and GSTIN for seamless ITC reconciliation.

GST TDS Rules for Govt Contracts

The government agency (payer) must generally deduct GST TDS at 2% when:

The contract value is above ₹ 2.5 lakh.
Both supplier and government department are GST-registered.
The supply is intra-state (for CGST + SGST scenario).

Contractors should match their TDS credits in their GSTR / ITC reconciliation to avoid mismatches.

Frequently Asked Questions (FAQs)

1. Is 18% GST always applicable on government works contracts?

Mostly yes, after the 2022 notification, 18% is the default rate unless a concessional rate applies.

2. When can a government works contract be taxed at 12%?

When the work is for local bodies (Panchayat/Municipality) or for public welfare with a specific concessional notification.

3. Can a sub-contractor charge a lower rate than the main contractor?

No — subcontractors must charge the same GST rate as the main contractor to ensure correct credit flow.

4. Is ITC allowed on construction materials used in these projects?

Yes, with proper documentation, ITC is typically allowed for materials and services used in government contracts.

5. How to handle GST TDS deductions?

You must reconcile TDS credits in your GST returns, ensure the deductor’s GSTIN is correct, and retain TDS certificates.

GST on Government Contracts — Complete Guide