GST and tax compliance for construction and infrastructure contractors
You raise a running-account bill for ₹40 lakh, the client retains 10% against defect liability, and you still have to pay GST on the whole ₹40 lakh this month. Meanwhile the ITC on the cement and steel that went into an immovable structure is blocked under section 17(5), the client has deducted 1% labour cess without telling you the basis, and your GSTR-2B is short because three sub-contractors filed late. This is the specific shape of construction compliance, and it is what we handle for contractors like Aardhya Construction.
What makes construction compliance different
Most trading businesses have a clean cycle: buy, sell, invoice, collect, claim credit. Construction has none of that. A single project runs across two or three financial years, the contract value moves with variation orders, payment arrives in slices against certified work, and a portion of every slice is held back for a year or more. Layered on top is a body of law — labour welfare, RERA, building bye-laws — that has nothing to do with tax but which the same small office has to comply with.
The consequence is that a contractor's GST liability, income-tax position and cash position drift apart. You can be profitable on paper, tax-compliant on the return, and still be unable to meet a payroll, because the tax was paid on money you have not yet received and the credit on money you have already spent is not available to you at all.
Three structural features drive this. First, works contract is a composite supply of service under Schedule II, so you cannot split the bill into "material" and "labour" and tax them differently — the whole certified value carries the works contract rate. Second, section 17(5)(c) and (d) block input tax credit where the result is an immovable property, which means much of your input tax is a cost, not a credit. Third, the sector runs on contract labour, and the principal employer carries statutory liability for the contractor's defaults.
The traps that actually cost money
Time of supply on running-account bills and retention
Under section 13 of the CGST Act, time of supply for services is the earlier of the invoice date (where the invoice is issued within 30 days of the supply) or the date of receipt of payment. There is no separate rule for retention. If you raise an RA bill for the full certified value and the employer retains 5% or 10%, GST is payable on the full value in that month's GSTR-3B. The retention comes back to you a year later, after defect liability expires, with no interest and no adjustment.
The workable answers are commercial and documentary rather than clever. Some contractors structure retention as a deduction from the certified amount so that the tax invoice is raised only for the net payable, with the retained portion invoiced when it becomes due. Whether that survives scrutiny depends entirely on how the contract defines when the supply is complete and what the certification actually certifies. We have seen both positions accepted and questioned; it is not settled, and we tell clients so before we set the pattern. What is not defensible is invoicing gross and paying tax on net.
Reverse charge on works contracts
RCM in construction shows up in more places than contractors expect: services from a goods transport agency where the GTA is on the 5% option, legal services from an advocate, security services from a non-body-corporate, sponsorship, and — for the biggest single exposure — supplies from unregistered persons in specified cases. Rented commercial premises taken from an unregistered landlord by a registered person also attract RCM following the October 2024 amendment. Every one of these has to be self-invoiced, paid in cash (RCM liability cannot be discharged from the credit ledger), and only then claimed as credit — and only where the credit is not itself blocked.
Blocked credit under section 17(5)(c) and (d)
Clause (c) blocks credit on works contract services for construction of immovable property, except where it is an input service for a further works contract. Clause (d) blocks credit on goods and services received for construction on your own account. The exception in both is "plant and machinery".
The Supreme Court in Safari Retreats (October 2024) read "plant or machinery" in clause (d) functionally, opening the door for buildings that serve as the apparatus of a business. The Finance Act 2025 then substituted "plant and machinery" for "plant or machinery" in clause (d) with retrospective effect from 1 July 2017, which is widely read as neutralising that decision. The retrospective substitution is itself being challenged. If you took a position on the strength of Safari Retreats, the exposure is live and you should know where you stand rather than discover it in an audit.
For a contractor building for a customer, the practical point is simpler: your credits on cement, steel and sub-contracted works are generally available because you are supplying a works contract onward. The block bites when you build for yourself — your own site office, your own godown, your own factory shed.
Joint development agreements
Where a landowner contributes land and the developer contributes construction, GST arises on both legs. Since April 2019, the developer's liability on development rights and long-term lease premium under reverse charge crystallises on the date of completion certificate or first occupation, whichever is earlier, and only to the extent of unbooked units. The apportionment of that liability, the valuation of the landowner's share of constructed area, and the treatment of area handed to the landowner remain among the most litigated questions in the sector. Anyone who tells you the JDA position is settled has not read the case law.
Labour cess, BOCW and the labour codes
Cess under the Building and Other Construction Workers' Welfare Cess Act runs at 1% of the cost of construction and is typically deducted at source by the employer. Establishments with ten or more building workers require registration. Since 21 November 2025 the four labour codes are in force nationally; building workers' welfare now sits within the Code on Social Security, which permits self-assessment of cess, and contract labour regulation has moved to the Occupational Safety, Health and Working Conditions Code with a higher licensing threshold than the old CLRA. Draft central rules were issued in 2026 and several states have not yet notified their own, so there is a genuine transitional gap on procedure. Registrations, licences and returns obtained under the repealed Acts continue to matter, and we are treating both regimes as live until the state rules land.
The unchanged principle is principal-employer liability: if your labour contractor fails to remit PF or ESI for workers on your site, the demand comes to you. Verifying the contractor's ECR acknowledgement and ESIC challan before releasing his bill is not paperwork, it is the only defence you have.
RERA
Where a project involves land above 500 square metres or more than eight apartments, RERA registration is mandatory, with quarterly progress updates and 70% of collections held in a designated account. Contractors executing work for a registered promoter are not themselves promoters, but their billing and completion certification feed the promoter's RERA filings, and mismatches surface there first.
What we do for construction clients
We start by reading the contract, not the ledger. The definitions of "certified value", "completion", "retention" and "variation" in your agreement determine your GST timing, and no amount of book-keeping fixes a contract that taxes you early.
From there the monthly work is: RA-bill-to-invoice mapping so that every certified bill has a matching tax invoice on the right date; RCM identification and self-invoicing; sub-contractor GSTR-2B reconciliation with a follow-up list of who has not filed, sent before the 3B is locked; ITC segregation between project credits, blocked credits and common credits requiring reversal under Rules 42 and 43; and a project-wise credit register so you know what a job actually cost after tax.
On the direct-tax side we handle TDS under section 393(1) Table Sl. 6 (formerly 194C) on sub-contractor payments, advance tax against a lumpy revenue profile, and the tax audit under section 63 (formerly 44AB). We also run the labour compliance calendar — PF, ESI, BOCW registration and cess, contractor licence status — because in this sector the tax file and the labour file fail together.
Where a project is under RERA, we coordinate the quarterly filings with the GST and accounting position so the three sets of numbers tell the same story.
What it costs
| Engagement | Indicative fee |
|---|---|
| GST monthly compliance, single GSTIN, up to 150 invoices | ₹6,000 – ₹12,000 per month |
| GST plus book-keeping, project-wise credit register | ₹15,000 – ₹30,000 per month |
| Labour compliance add-on (PF, ESI, BOCW, contractor verification) | ₹5,000 – ₹15,000 per month |
| Tax audit under section 63 and return filing | ₹25,000 – ₹75,000 per year |
| Contract review for GST timing and retention structuring | ₹15,000 – ₹40,000 per contract |
| Departmental audit, ASMT-10 or show-cause response | Quoted on the notice |
Fees depend on turnover, number of registrations, project count and the condition of the existing records. First meeting is at our cost and we will tell you plainly if your current arrangement is adequate.
Common questions
Do I have to pay GST on retention money before I receive it?
On the standard structure, yes. Time of supply under section 13 is the earlier of invoice date or payment receipt, so if your RA bill is raised for the gross certified value, GST is payable on the gross value that month even though 5–10% is retained. Some contractors invoice only the net payable and raise a separate invoice when retention is released, but whether that holds depends on how your contract defines completion and certification. It is worth structuring deliberately at contract stage rather than arguing about it later.
Can I claim ITC on cement and steel used in a project?
If you are executing a works contract for a customer, generally yes — section 17(5)(c) has an exception where the works contract service is an input service for the further supply of works contract service, and clause (d) applies to construction on your own account. Where you build something for yourself, such as your own office or godown, the credit is blocked. The Safari Retreats judgment widened the plant-and-machinery exception but the Finance Act 2025 amended clause (d) retrospectively from 1 July 2017 to reverse that reading, and the amendment is under challenge — so any position taken on that basis should be documented and provisioned for.
My client deducted 1% labour cess. Is that in addition to GST TDS?
Yes, they are separate. BOCW welfare cess at 1% of construction cost is a labour welfare levy under a different statute, deducted and remitted to the state welfare board. GST TDS at 2% under section 51 applies where the recipient is a government department, local authority or notified entity and the contract value exceeds ₹2.5 lakh, and it is credited to your electronic cash ledger. Income-tax TDS under section 393(1) Sl. 6 is a third deduction. All three can hit the same bill, and reconciling them is a routine part of the monthly work.
What is the tax audit threshold for a contractor now?
Under section 63 of the Income-tax Act 2025 (formerly section 44AB), the base threshold is ₹1 crore of turnover, extended to ₹10 crore where both cash receipts and cash payments are 5% or less of the respective totals. Commentators have flagged a further trigger in section 63 requiring audit where an eligible assessee declares profit below the deemed presumptive rate, regardless of whether the presumptive scheme was ever opted into — which would be a meaningful change from the old position. That reading is not universally accepted and there is no settled departmental guidance yet, so for FY 2026-27 we are advising contractors with thin declared margins to plan on the audit being required.
My sub-contractor has not filed his GSTR-1, so my 2B is short. What can I do?
Section 16(2)(aa) makes credit conditional on the invoice appearing in your GSTR-2B, and since July 2025 the auto-populated liability in GSTR-3B is hard-locked, so you cannot simply claim it and explain later. The practical answer is contractual and procedural: build a filing-compliance condition into sub-contract payment terms, run the 2B reconciliation before the 20th rather than after, and hold back the tax component of the sub-contractor's bill until his invoice reflects. Chasing credit after the 3B is filed is a much weaker position than withholding payment before it.
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