GST (Goods and Services Tax) in Procurement

GST (Goods and Services Tax) is the unified indirect tax that replaced the earlier VAT, service tax, and excise duty regime in India from July 2017. In government procurement, GST applies to most supply of goods, services, and works contracts, and bidders must correctly price and account for GST to avoid financial losses and compliance penalties.

What is GST in government procurement?

GST applies at rates determined by the HSN (Harmonized System of Nomenclature) code for goods and SAC (Services Accounting Code) for services. The applicable rates across procurement categories are:

Works contracts for government: 12 percent GST applies to works contracts for building construction, civil engineering, and related works for government and government entity clients. This is a reduced rate compared to the standard 18 percent for commercial construction. Pure labour contracts have different treatment.

Goods supply: Rates vary from 5 percent (food items, some agricultural inputs) to 12, 18, or 28 percent depending on the HSN code. Office equipment, vehicles, and IT hardware typically attract 18 or 28 percent. Capital goods attract 18 percent.

Consultancy and professional services: 18 percent GST on all consultancy, legal advisory, architecture, design, and similar intellectual services to government clients.

Exemptions exist for some government procurement: pure services to government entities for public interest (certain healthcare, education, agriculture support) may be exempt. Verification against the exemption list under the GST Act is essential.

The standard practice in government BOQs is to quote rates exclusive of GST, with a separate line showing the applicable GST rate and amount. The government pays GST over and above the quoted rates and claims Input Tax Credit (ITC) in some circumstances. Bidders who quote inclusive of GST when the NIT asks for exclusive rates will appear costlier by the GST percentage and may lose the L1 position.

Why it matters for bidders

GST treatment errors in bid pricing are one of the most common and consequential mistakes in government procurement. A contractor who prices a BOQ inclusive of 12 percent GST when the NIT asks for exclusive rates will appear 12 percent more expensive than competitors who correctly quote exclusive, and may lose a contract they could have won.

Reverse Charge Mechanism (RCM): For certain procurement categories, the government entity (recipient) is required to pay GST directly to the government rather than to the supplier. Suppliers in these categories must not include GST in their invoices. Charging GST when RCM applies results in double payment and compliance issues.

Composition scheme suppliers cannot work for most government contracts above the composition turnover threshold, so government-focused companies should confirm they are under the regular GST registration scheme.

TDS on GST: Government entities deduct TDS at 2 percent (1 percent CGST + 1 percent SGST) on payments to GST-registered suppliers above Rs 2.5 lakh per contract. This is in addition to income tax TDS. Bidders should account for this in cash flow planning.

Example

An NHAI EPC contract BOQ for bituminous road construction specifies: "Quote exclusive of GST. GST at applicable rate (12% for works contract) will be paid by NHAI over the BOQ rate." A contractor quotes Rs 85 per sqm for surface course. NHAI pays Rs 85 + Rs 10.20 GST = Rs 95.20 per sqm. A competing contractor who misreads the instruction and quotes Rs 95.20 inclusive of GST appears to be quoting Rs 95.20 against the first contractor's Rs 85, loses the L1 position on a 12 percent self-inflicted handicap.

Key rules / thresholds

• Works contracts for government: 12 percent GST.
• Consultancy and services: 18 percent GST.
• Goods: varies by HSN (5-28 percent); verify for each product category.
• Government TDS on GST: 2 percent deducted from each payment on contracts above Rs 2.5 lakh.
• NIT will specify whether rates should be exclusive or inclusive of GST, exclusive is the standard for most government BOQs.
• Exemptions for some government services must be confirmed against the GST exemption notification.