The implementation of the Goods and Services Tax (GST) in India has significantly impacted the way government contracts are executed. Contractors and suppliers working with Central, State, or Local governments must understand the applicable GST rates, tax liability, and compliance requirements to avoid legal complications and ensure smooth project execution.
Government contracts typically include:
🚧 Civil works (roads, bridges, public buildings)
🛠️ EPC contracts (Engineering, Procurement, Construction)
🧰 Maintenance and repair services
🚿 Public utility projects (water supply, sanitation)
🖥️ IT and consultancy services
🏥 Medical and infrastructure supply to government bodies
Under GST law, government is treated as a recipient of service, and contractors are considered service providers. As such, most contracts executed for the government are taxable supplies under GST.
If the contract involves supply of goods or services
Whether executed for Central Government, State Government, Local Authority, or a Government Undertaking
GST is applicable even if payment is made from public funds.
| Type of Contract/Service | GST Rate | Notes |
|---|---|---|
| Pure services to government (e.g., cleaning, security) | Exempt (under certain conditions) | Only if no goods involved |
| Composite supply (goods + services) | 12% or 18% | Depends on work type |
| Works contract for government infrastructure | 12% | With ITC availability |
| Other works contracts (general civil works) | 18% | Full ITC allowed |
| Consultancy services (engineering, legal, etc.) | 18% | Taxable with ITC |
| Supply of goods (materials, equipment) | 5%–18% | Based on item classification |
In some government contracts, Reverse Charge Mechanism (RCM) may apply:
📜 If services are provided by an individual or HUF to a government department, RCM may apply under certain notifications.
🚫 However, most registered contractors supply under forward charge, and RCM is not applicable.
Services like solid waste management, street lighting, public health
No material involved
Supplied to government or local authorities
✅ Exempt from GST
Services involving both labor and goods/materials
Treated as works contract
Attracts 12% or 18% GST depending on nature
🧾 Contractors must issue GST-compliant tax invoices
📤 File regular returns (GSTR-1, GSTR-3B)
💰 Claim eligible Input Tax Credit (ITC)
🗂️ Maintain documentation for audit and reconciliation
🌍 If the government body is located in a different state, the contract may be treated as an inter-state supply, attracting IGST
🚧 Projects funded by international bodies but executed via Indian government agencies are taxable under GST
🛑 No GST exemption based on government funding alone—supply nature is what matters
| Category | GST Rate | ITC Available | Notes |
|---|---|---|---|
| Pure Services to Govt. | 0% | ❌ Not applicable | Subject to Notification 12/2017 |
| Works Contract (Roads, Canals) | 12% | ✅ Yes | For specified public projects |
| General Works Contract | 18% | ✅ Yes | Includes labor + goods |
| Consultancy / IT Services | 18% | ✅ Yes | Standard taxable services |
| Supply of Goods (equipment, etc.) | 5–18% | ✅ Yes | Depends on HSN classification |
Government contracts under GST are largely taxable, with a few exemptions for pure services provided to government bodies. For contractors:
💼 Proper classification of the contract is crucial (pure vs. composite).
📑 Understanding applicable GST rates and maintaining documentation ensures compliance.
🧾 Input Tax Credit benefits are available for taxable contracts, helping reduce cost burdens.
A well-informed GST strategy ensures smooth execution, timely billing, and reduced tax disputes for any contractor or vendor working with the government.