GST on Works Contract India 2026 — 18% Rate, ITC Rules, Affordable Housing 1%

Works contracts — where both goods and services are supplied together for construction — have specific GST rules that differ from pure goods or pure services. The ITC restrictions under Section 17(5) make this one of the most complex areas of GST compliance. Here is the complete guide for 2026.

What Is a Works Contract?

A works contract is a contract where:

• Both goods (materials) and services (labour) are supplied together
• The contract involves construction, fabrication, installation, or commissioning of immovable property

Examples:

• Building construction (residential, commercial)
• Road and bridge construction
• Interior fit-out work
• Electrical and plumbing installation
• Plant and machinery installation

GST Rates on Works Contracts

Affordable Housing — 1% GST

For residential properties classified as "affordable housing":

• Stamp duty value: ≤ ₹45L
• Carpet area: ≤ 60 sq.m. in metro cities, ≤ 90 sq.m. in non-metro cities
• GST rate: 1% (without ITC)

The developer cannot claim ITC on inputs (cement, steel, labour) for affordable housing projects.

Non-Affordable Residential Housing — 5% GST

For residential properties not classified as affordable:

• GST rate: 5% (without ITC)
• Developer cannot claim ITC on inputs

Commercial Construction — 18% GST

For commercial properties (offices, shops, malls, hotels):

• GST rate: 18% (with ITC)
• Developer can claim ITC on inputs (cement, steel, labour, professional services)

ITC Blocked Under Section 17(5) — The Critical Rule

Section 17(5)(c) and 17(5)(d) of the CGST Act block ITC on works contract services for construction of immovable property:

ITC NOT available on:

• Works contract services for construction of immovable property (other than plant and machinery)
• Goods or services used for construction of immovable property on own account

ITC IS available on:

• Works contract services used as input service for further supply of works contract services (sub-contractor to main contractor)
• Construction of plant and machinery (not immovable property)

Example:

• A builder constructs a commercial building for sale
• ITC on cement, steel, and labour: NOT available (Section 17(5))
• ITC on architect fees, legal fees: Available (professional services, not construction)

Supreme Court ruling (2024): The Supreme Court held that ITC on construction of immovable property meant for renting is available. This is a significant ruling that may benefit commercial property owners who rent out their properties.

Sub-Contractor Rules

When a main contractor sub-contracts work:

• Sub-contractor charges 18% GST on works contract services
• Main contractor can claim ITC on sub-contractor's invoice (since it is an input service for further supply of works contract)
• Main contractor charges GST to the client at the applicable rate

Government Works Contracts — 12% GST

Works contracts for government entities (Central/State Government, local bodies):

• GST rate: 12%
• Applies to: Roads, bridges, railways, metro, airports, ports, irrigation projects
• ITC available for the contractor

GST TDS on government contracts: Government entities deduct TDS at 2% on payments to contractors under Section 51 of the CGST Act.

Reverse Charge Mechanism for Works Contracts

RCM applies in limited cases:

• Works contract services provided by an unregistered person to a registered person: RCM applies
• The registered recipient pays GST under RCM

E-Invoicing for Construction Companies

Construction companies with annual turnover above ₹5 crore must generate e-invoices for all B2B transactions. This includes works contract invoices to registered businesses.

Frequently Asked Questions

Is GST applicable on the purchase of an under-construction flat?

Yes. Under-construction flats attract GST:

• Affordable housing: 1% (without ITC)
• Non-affordable residential: 5% (without ITC)
• Commercial: 12% (with ITC)

Ready-to-move-in flats (with completion certificate) are exempt from GST.

Can a homebuyer claim ITC on GST paid for under-construction flat?

No. Homebuyers cannot claim ITC on GST paid for residential property purchases. ITC is only available for businesses using the property for taxable supplies.

Is GST applicable on renovation and repair work?

Yes. Renovation and repair services attract 18% GST. This includes painting, plumbing, electrical work, and interior design services.

What is the GST rate on labour-only contracts (no materials)?

Pure labour contracts (no materials supplied) are treated as services and attract 18% GST. If the contract involves both labour and materials, it is a works contract.

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