Introduction to GST on Construction Services
The construction industry in India is valued at $639 billion. It is estimated to grow at a CAGR of 6% from 2024 to 2029. Post-covid, Indian businesses are looking for ways to attract their workforce back to the office. This has resulted in a surge in demand in real estate and construction industries.
In this blog, we will dive deep into the construction industry and explore the importance and impact of GST on construction services.
Basics of GST for Construction Services
In contract parlance, a works contract for construction can be considered as a contract of service. This also involves supply of goods for the execution of said contract. Thus, a works contract for construction can be considered as a composite of both supply of goods and execution of services.
Before the introduction of GST, VAT was levied on the transfer of the goods involved in the contract. Later, when service tax was introduced, service tax was levied on the service component.
After the introduction of GST, the ambiguity regarding works contracts that included both goods and services disappeared. Under GST, a work contract only involves service on immovable property. As per Section 2(119) of the CGST Act, 2017, a works contract refers to a contract for building and construction activities, including fabrication, erection, completion, installation, improvement, modification, maintenance, and repair involving an immovable property.
When the work involves a supply of goods, for example, a paint job, it will be considered as a composite supply job and not as a works contract.
SAC Codes and Their Significance
Just like supply of goods, which involves an HSN code, the supply of services involves a Service Accounting Code (SAC). The SAC code is used for all types of services offered within India. The SAC code is relevant when GST is applicable on the services.
The SAC code is based on the United Nations Central Product Classification (UNCPC). However, the international code is modified to suit the Indian context. The GST rate is determined based on the SAC code and it varies from 0% to 28% The default GST for services is 28%, but if the service has an SAC code, it is charged accordingly.
All the SAC codes have six digits and they all start with the digits 99. For example, the SAC code for construction of commercial buildings like office buildings, halls, restaurants, hotels, and malls is 995414. The breakdown of this SAC code is as follows:
- 99 – refers to the Chapter
- 54 – refers to the heading under the Chapter (in this case, Construction Services)
- 14 – refers to the service code
The SAC code is significant because it
- Uniquely identifies each service
- Enables GST taxpayers to find the applicable GST rate
- Streamlines income tax return filing
From April 1, 2021, GST taxpayers must mandatorily mention the SAC code for the list of services they provide. The requirements are as follows:
| Aggregate Turnover | Number of digits of SAC code |
| Up to Rs. 5 crore | 4 for B2B tax invoices and optional for B2C tax invoices |
| More than Rs. 5 crore | 6 for all B2B and B2C tax invoices |
Not mentioning the SAC code in the GST tax invoice or using the wrong code will result in a penalty. As per the latest rules, the penalty for mentioning an incorrect SAC code is Rs. 50,000.
Also Read: How Do I Find My GST SAC Code?
Understanding Input Tax Credit (ITC) in Construction Services
Within the GST framework, the Input Tax Credit (ITC) is crucial for all businesses to offset their GST liabilities. Businesses can claim ITC for the tax paid and reduce their overall tax liability. As multiple players are involved in the construction sector, understanding the implications of ITC is pivotal.
Construction projects involve purchasing of different raw materials for which the developers have to pay GST. Thus, they must understand the ITC to reduce their taxes. The GST laws have imposed certain restrictions on how construction companies can claim ITC.
GST aims to reduce the burden of taxation. However, there is something called ‘Blocked credit’, which disallows taxpayers from claiming ITC.
By analysing the works contract as per Section 2(119), we can infer several guidelines for claiming ITC.
Works Contract Services
ITC for works contract services can be claimed when the services also come under works contract services. For example, consider a contractor X, who offers plumbing services to a customer. This is a works contract service between X and the customer. Now, X can use the services of a plumber, Y. This is again a works contract between X and Y. So, X can claim ITC against invoices issued by Y. Thus, builders who use the services of other contractors can claim ITC on their works contract.
Construction of Immovable Property
For construction of immovable property except machinery and plant, a builder cannot claim ITC. For example, when a builder builds a factory, they have to procure cement, tiles, and other construction materials. However, they cannot claim ITC for this. These restrictions apply only on immovable properly. For a machinery or a plant, these restrictions do not apply.
Movable Property
ITC is allowed for construction of any movable property.
Renovations, Alterations, and Repair
In case of renovations, alterations, and repair, ITC cannot be claimed when the cost involved is capitalised in account books. However, when cost involved is considered as revenue expenditure and not capitalised in account books, ITC can be claimed.
GST Rates and Compliance in Construction Sector
As per the latest notification and update, the following GST rates apply:
For the construction of residential buildings from 01-04-2019:
| Description | GST rate |
| Affordable residential buildings | 1% without ITC |
| Residential buildings other than affordable housing | 5% without ITC |
The affordable and non-affordable housing projects are distinguished based on the carpet area. For projects that commenced before this date, the developer has the option to choose the GST rate. They can choose to continue with the older rates of 8% and 12% and claim the allowed ITC or follow the new GST rate.
For commercial buildings, the GST rates are as follows:
| Description | GST |
| Commercial apartments in a Residential Real Estate Project (RREP) | 5% without ITC |
| Commercial apartments in a Real Estate Project (REP) | 12% with ITC on total consideration |
As construction projects are high cost projects, finding and applying the right GST is paramount. Choosing the wrong category or applying the wrong rate can result in huge penalties. For some projects, ITC can be claimed and for some projects, it cannot. So, there is often compliance difficulties. Small and medium sized construction companies often need help with record-keeping.
Due to the higher GST rates on construction supplies, the cost of the project can rise. As construction companies pay GST upfront, it can also inhibit cash flow.
Also Read: GST Rates and SAC Code on Construction Services
Impact of GST on Contractors and Developers
GST implementation has benefitted every sector in India. Eliminating service tax, VAT, and central duty, as well as clearly defining works contract has benefited construction companies.
However, the new GST laws without ITC pose numerous challenges. For construction of a square foot, the GST cost varies from Rs. 300 to 600 based on the project value. Not being eligible to claim ITC will force developers to transfer the higher cost to the property owners. As a result, home owners will find it even more difficult to afford houses. As the GST on cement is 28%, the increased cost makes it less favourable for affordable housing projects. The realtors council Credai has requested the government to reduce the GST burden on developers.
Also Read: What Impact Has GST Had On The Real Estate Sector?
Conclusion
With the increase in the number of public and private sector construction projects in India, the construction companies stand to benefit from the single taxation system promoted by GST. Compared to the previous system, the GST system offers relief for developers and realtors. However, ITC implications are complicated when the construction project involves multiple parties. Understanding when ITC is allowed is crucial for developers. Using an automated billing system will help eliminate the difficulties in calculating GST liabilities.
CaptainBiz, India’s leading GST automated billing software, can be leveraged to apply the right SAC/HSN codes and ensure tax compliance.
FAQs
How does GST apply to construction services?
GST has replaced multiple indirect taxation systems. It presents a unified tax approach. For construction services, the work offered is considered a service. Applicable GST rates vary based on the size of the construction project.
Are SAC codes important?
Yes, SAC codes are allocated based on the classification of construction services. Using the correct SAC code is crucial to ensure accurate tax calculations. Construction companies issuing invoices must mention the SAC code.
How can I know the correct SAC number?
You can refer to the GST council’s official SAC code list to find the correct SAC code for the construction service you offer. If you are a small or medium-sized company providing one specific construction service, this SAC code will remain the same for all your invoices. However, if you provide comprehensive construction services, choosing the correct SAC code for each construction activity is pivotal.
Can I use the same GST rate for all types of construction services?
No, the GST rate varies based on the construction service and type of property. For example, affordable residential housing and non-affordable housing projects are taxed at different rates. Using the correct GST rate is crucial.
Are there special exemptions on GST for construction projects?
Yes, some of the construction services are tax exempted. You must refer to the official GST Council website for updated notifications.
Are subcontractors liable to pay GST?
Yes, all subcontractors who are registered GST taxpayers are liable to pay GST. When you work for a construction company as a sub-contractor, you will enter a works contract, which incurs GST. Depending on the type of service, you may also be eligible to claim ITC.
Can I claim ITC on all construction projects?
No, ITC is allowed for construction projects involving movable property. For immovable property, ITC is allowed only in some instances. You must understand ITC implications to evaluate the cost of the project.
What can I do to claim ITC for construction services?
You can refer to the allowed ITC list of the GST council. In case of ambiguity, refer to a tax advisor.
Are there GST penalties for construction projects?
Yes, every registered GST taxpayer must pay a penalty if they pay the wrong tax amount.
Can I choose between the old and new GST regime?
GST rates have been updated in 2019, and all projects that commence after April 1 2019, will be taxed according to the latest update. However, for projects that have commenced before 2019, you can choose between the old taxation system and the new GST regime.
