GST (Goods and Services Tax) in Procurement

GST in Indian government procurement applies differential rates by contract type, 12% on works contracts, 18% on consultancy, and 5-28% on goods by HSN code, with BOQ rates quoted exclusive of GST unless the NIT specifies otherwise.

What is GST in Procurement?

Goods and Services Tax (GST), introduced in India on July 1, 2017, replaced a complex web of central and state indirect taxes (central excise, VAT, service tax, entry tax) with a unified dual-structure tax (central GST + state GST, or IGST for inter-state supply). In government procurement, GST is a critical pricing variable because it significantly increases the total cost to the government buyer.

Key GST rates in government procurement contexts:

Works contracts for government buildings: 12% GST (a concessional rate for government construction compared to 18% for private construction). This rate applies to composite works contracts involving both supply of materials and labour.

Consultancy and professional services: 18% GST. This applies to architects, management consultants, IT system designers, surveyors, and other service providers.

Goods supply: varies from 5% (essential goods, some foods, medicines) to 12% (construction materials like cement, steel, pipes) to 18% (electronics, machinery) to 28% (luxury items). Each HSN code has a specific rate, and getting the HSN classification right affects pricing significantly.

Pure labour/service contracts (no material supply): 18% GST.

For BOQ pricing in government tenders: most NITs specify that rates should be quoted exclusive of GST, with GST paid additionally by the department on submission of a valid GST invoice. A minority of NITs (particularly for goods supply on GeM) specify inclusive rates.

Why GST Matters for Government Suppliers

An error in GST treatment, quoting inclusive rates when the NIT says exclusive, or applying the wrong GST rate, can make a competitive bid uncompetitive or create a loss-making contract. Understanding Input Tax Credit (ITC) entitlements (where your GST inputs can be credited against your GST output liability) and the Reverse Charge Mechanism (where the government buyer may pay GST directly to the government instead of to you) affects your true cost calculation.

Example

A contractor quotes Rs 4.5 crore (exclusive of GST) for a government hospital building works contract. The applicable GST rate is 12% on works contracts = Rs 54 lakh in GST. Total invoice to the department: Rs 5.04 crore. The department pays Rs 4.5 crore to the contractor and remits Rs 54 lakh as GST to the government under the Reverse Charge Mechanism (applicable for government clients under Notification No. 13/2017). The contractor's GST liability for this invoice is discharged by the department's RCM payment.

Frequently Asked Questions

What is the Reverse Charge Mechanism (RCM) for government contracts?

Under GST Notification No. 13/2017 (Central Tax Rate), when a registered supplier provides services to a government entity (central or state government, local authority, government authority), the government entity (recipient) is required to pay GST under the Reverse Charge Mechanism rather than the supplier. This means the government department pays GST directly to the government exchequer, reducing the supplier's compliance burden. The supplier does not collect GST from the government but issues an invoice at the base rate, noting that GST will be paid by the recipient under RCM.

Can a government contractor claim Input Tax Credit on their GST payments?

A contractor registered under GST can claim ITC on GST paid on inputs (materials, subcontractor services, equipment hire) used in executing government contracts. However, if the output supply is exempt or at a reduced rate, ITC eligibility depends on the specific supply chain structure. Contractors should consult a GST practitioner to optimise their ITC position across complex multi-project, multi-state government work portfolios.

Is GST included in the estimated cost published in the NIT?

The NIT typically states whether the estimated contract value is inclusive or exclusive of GST. Most central government works NITs quote the estimated cost exclusive of GST. For price comparison (L1 determination), all bids are compared on the same basis (exclusive of GST, since GST is added uniformly to all bids). GeM catalog prices may be displayed inclusive or exclusive of GST depending on the portal setting and product category.

How does TDS interact with GST on government contract invoices?

TDS (Tax Deducted at Source) under Income Tax Act applies to the base amount of the government contract invoice (before GST). GST is applied to the base amount, and TDS is deducted from the base amount only, not from the GST component. Additionally, under GST law itself, certain government entities must deduct TDS on GST at 2% (1% CGST + 1% SGST) on supplies received from registered suppliers for contracts above Rs 2.5 lakh, reducing the supplier's GST liability accordingly.