Under GST, a works contract relating to immovable property is treated as a supply of service, generally taxable at 18%. Input tax credit on works-contract services for construction of immovable property is blocked under Section 17(5)(c), except where it is an input for further works-contract service or relates to plant and machinery.
Works contract as a service
Schedule II to the CGST Act treats a works contract (as defined in Section 2(119) — building, construction, fabrication, installation, repair, etc. of immovable property involving transfer of property in goods) as a supply of service. This settled the pre-GST goods-vs-service debate. The standard rate is 18%, with some concessional rates historically for specified government and affordable-housing works — many of which have been withdrawn. Verify the rate for your specific contract and period.
The ITC question: Section 17(5)(c) and (d)
| Scenario | ITC position |
|---|---|
| Works contract for construction of immovable property (own use) | Blocked — Section 17(5)(c) |
| Works contract that is input for further works-contract service | Allowed |
| Works contract for plant & machinery | Allowed |
| Goods/services for self-construction of immovable property | Blocked — Section 17(5)(d) |
Worked example
A manufacturer engages a contractor to build a factory shed (immovable property) for its own use; GST on the works contract is blocked under Section 17(5)(c). But GST on the works contract for the foundation and structural support of plant and machinery is allowed, because Section 17(5)(d)'s exclusion for 'plant and machinery' applies. Careful contract scoping and documentation determine the credit.
Practical notes
- A real-estate developer providing construction services can claim ITC on sub-contracted works contracts (input for output works contract), subject to the scheme opted.
- 'Plant and machinery' excludes land, buildings and civil structures — read the definition carefully.
- Maintain a clear bifurcation between blocked civil works and eligible plant-and-machinery works in the contract and books.
Key takeaways
- Works contract on immovable property is a service, generally at 18%.
- ITC is blocked under Section 17(5)(c) for own construction of immovable property.
- Exceptions: input for further works contract, and plant and machinery.
- Bifurcate civil works from plant-and-machinery works for credit clarity.