Industries · Construction & Infrastructure
Construction & Infrastructure
Works contract GST, retention timing, blocked ITC, BOCW and labour codes
You raise a running-account bill for the full certified value, the employer retains 5 or 10% against defect liability, and GST still falls due on the whole amount in that month’s GSTR-3B. Meanwhile input tax on cement and steel that goes into an immovable structure is blocked under section 17(5), and three sub-contractors who filed late leave your GSTR-2B short.
We run compliance for civil contractors and infrastructure firms: RA-bill-to-invoice mapping so every certified bill carries a tax invoice on the right date, reverse-charge identification and self-invoicing, sub-contractor 2B reconciliation before the return is locked, project-wise credit registers, and the labour calendar — PF, ESI, BOCW registration and cess, contractor licence status — because in this sector the tax file and the labour file fail together.
Compliance challenges we solve
Time of supply on retention
Section 13 fixes time of supply at the earlier of invoice date or payment received. Invoice gross and you pay GST on money you will not see for a year.
Blocked credit u/s 17(5)
Clauses (c) and (d) block credit where the result is immovable property. We segregate project credits, blocked credits and common credits needing Rule 42/43 reversal.
Reverse charge exposure
GTA on the 5% option, advocates, security services from a non-body-corporate, sponsorship, and commercial premises rented from an unregistered landlord — each self-invoiced and paid in cash.
Labour cess and principal-employer liability
BOCW cess at 1% of construction cost, plus liability for a labour contractor’s PF and ESI defaults. Verifying his ECR and ESIC challan before releasing his bill is the only defence.
Why construction compliance behaves differently
Most trading businesses run a clean cycle — buy, sell, invoice, collect, claim credit. Construction runs on none of it. A single project spans 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.
The consequence is that your GST liability, income-tax position and cash position drift apart. Works contract is a composite supply of service under Schedule II, so the certified value carries one rate and cannot be split into material and labour. Section 17(5)(c) and (d) block credit where the output is immovable property. And the sector runs on contract labour, where the principal employer carries statutory liability for the contractor’s defaults.
Time of supply, retention and blocked credit
Under section 13 of the CGST Act, time of supply for services is the earlier of the invoice date or the receipt of payment, and there is no separate rule for retention. Raise an RA bill for the full certified value and GST is payable on that full value the same month, even though the retained portion comes back a year later with no interest and no adjustment.
The workable answers are commercial and documentary rather than clever, and they start in the contract. On credit, a contractor executing a works contract for a customer can generally claim input tax on cement, steel and sub-contracted work, because clause (c) excepts a works contract that is an input service for a further works contract. The block bites when you build for yourself. Safari Retreats widened the plant-and-machinery exception in clause (d); the Finance Act 2025 substituted the wording retrospectively from 1 July 2017, and that substitution is itself under challenge.
Reverse charge, labour cess and RERA
Reverse charge appears in more places than contractors expect — a goods transport agency on the 5% option, an advocate, security services from a non-body-corporate, sponsorship, and commercial premises rented from an unregistered landlord. Each must be self-invoiced and paid in cash, since RCM liability cannot be discharged from the credit ledger, and only then claimed where the credit is not itself blocked.
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, with registration required for establishments employing ten or more building workers. Since 21 November 2025 the four labour codes are in force, moving building workers’ welfare into the Code on Social Security and contract labour regulation into the OSH Code, with several state rules still unnotified — so we treat both regimes as live. Where a project falls under RERA, we align the quarterly filings with the GST and accounting numbers so all three tell the same story.
Frequently asked
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 receipt of payment, so if the RA bill is raised for the gross certified value, GST is payable on that gross value the same month even though 5 to 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 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 a further supply of works contract service, and clause (d) applies to construction on your own account. Where you build for yourself, such as your own site 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.
My client deducted 1% labour cess. Is that in addition to GST TDS?+
Yes, they are separate levies. BOCW welfare cess at 1% of construction cost is deducted and remitted to the state welfare board under a different statute. 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) Table Sl. 6 is a third deduction. All three can hit the same bill.
Which TDS applies to my sub-contractor payments?+
Payments to sub-contractors fall under section 393(1) Table Sl. 6 of the Income-tax Act 2025, the successor to section 194C — 1% where the payee is an individual or HUF and 2% otherwise. We run this alongside advance tax against a lumpy revenue profile, since construction receipts rarely arrive evenly across the four instalment dates.
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 claim it and explain later. The 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 his bill until the invoice reflects.
Do I owe GST under reverse charge on rented premises?+
Where a registered person takes commercial premises from an unregistered landlord, reverse charge applies following the October 2024 amendment. As with every RCM entry, the liability must be self-invoiced and paid in cash — it cannot be discharged from the credit ledger — and only then claimed as credit, and only where that credit is not itself blocked.
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 also flagged a reading of section 63 requiring audit where an eligible assessee declares profit below the deemed presumptive rate, whether or not the presumptive scheme was opted into. That reading is contested and unsettled, so for contractors with thin declared margins we plan on the audit being required.
When does RERA affect my work?+
RERA registration is mandatory where a project involves land above 500 square metres or more than eight apartments, with quarterly progress updates and 70% of collections held in a designated account. A contractor executing work for a registered promoter is not himself a promoter, but his billing and completion certification feed the promoter’s RERA filings, and mismatches surface there first — so we coordinate the quarterly filings with the GST and accounting position.
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