The construction industry is one of the pillars of India’s economy. It not only provides jobs but also drives growth in allied sectors such as steel, cement, and real estate. Whenever there is a change in tax policy, construction is among the first industries to feel its impact. One of the biggest reforms in recent years has been the Goods and Services Tax (GST). The government has recently revised the GST rate on construction projects, and this has created a wave of discussion among buyers, builders, and contractors. In this blog, we will cover everything you need to know about the new GST rate, its advantages, drawbacks, and long-term effects on the construction sector.

What is GST and Why Does it Matter in Construction?

GST is a unified tax that replaced multiple indirect taxes like VAT, excise duty, and service tax. It is applied on both goods and services to bring transparency and remove the issue of double taxation.

In construction, GST plays a major role because:

• It is charged on building materials such as cement, steel, tiles, and paints.
• It is applied on construction services offered by developers and contractors.
• It affects the overall cost of both affordable and luxury housing projects.

Thus, any change in GST directly impacts project costs and property prices.

New GST Rate 2025 – What Has Changed?

In 2025, the government revised GST rates to bring more transparency and to reduce disputes in real estate and infrastructure projects. While exact rates may differ depending on the category, the major focus has been on:

• Affordable housing – GST kept low to support first-time homebuyers.

• Luxury housing and commercial projects – Higher GST to balance the revenue.

• Raw materials – Small adjustments in cement, steel, and tiles to stabilise construction costs.

These changes aim to strike a balance between government revenue and industry growth.

GST on Construction Services

In India, construction services fall under GST because they are treated as a supply of service under Schedule II of the CGST Act. The general GST rate for construction services is 18%, but there are important exceptions:

• Affordable housing projects – 1% without ITC.

• Works contract for government projects – 12%.

• Roads, bridges, airports, tunnels – reduced rates to encourage infrastructure growth.

• Commercial projects – generally taxed at 18%.

This structure ensures that affordable housing is supported, while luxury and commercial projects contribute higher tax revenue.

GST Rate on Construction Services in 2025 with HSN Code

Note: For residential complexes, one-third of the total value is deducted towards land before calculating GST.

GST on Construction Materials in 2025

Just like services, construction materials also attract GST at different rates. Below is a summary:

Cement continues to carry one of the highest GST rates (28%), making it a costly component in any construction project.

Factors Affecting GST Applicability on Construction Services

1. Type of Construction

   • Residential vs commercial projects attract different GST rates.

   • Affordable housing enjoys a concessional rate.

2. Nature of the Transaction

   • Sale of under-construction property attracts GST.

   • Completed properties (with a completion certificate) are exempt.

   • Leasing or renting for business may invite GST.

3. Stakeholders Involved

   • Buyers, sellers, contractors, and developers all have different GST liabilities.

   • Registered vs unregistered parties affect compliance and ITC eligibility.

GST Applicability on Construction Work in India

• Under-construction properties – GST is charged as they are considered a supply of service.

• Completed properties – Exempt, provided a completion certificate is issued.

• Affordable housing – 1% GST without ITC.

• Resale of property – Exempt from GST.

• Pure labour contracts – Exempt under certain government housing schemes like PMAY.

• e-Way bills – Mandatory for transporting construction materials worth more than ₹50,000.

GST Calculation on Under-Construction Property (Example)

Suppose a flat costs ₹50 lakhs (agreement value) under general housing:

• Service Component (18%)
  GST = (₹50,00,000 × 18%) = ₹9,00,000

• Material Component (₹10 lakhs at 18%)
  GST = (₹10,00,000 × 18%) = ₹1,80,000

• Total GST Payable = ₹9,00,000 + ₹1,80,000 = ₹10,80,000

In affordable housing, this would drop to just 1% on the agreement value.

Input Tax Credit (ITC) on Construction Activities

• Not available: For construction of immovable property meant for personal use, renovation, or repair.

• Available: For developers and contractors if the construction is for further supply of taxable works contract services or plant and machinery.

This means homebuyers cannot claim ITC, but businesses engaged in construction can benefit if they meet the conditions.

Common Challenges in GST for the Construction Sector

1. Compliance Burden – Small contractors struggle with GST filings and HSN codes.

2. Cash Flow Issues – GST is paid upfront, even if client payments are delayed.

3. Classification Confusion – Identifying the correct GST rate for specific services and materials often causes disputes.

4. High Material Costs – Cement and tiles taxed at 28% significantly increase project expenses.

Positive Impacts of the New GST Rate

1. Lower tax for buyers
   Buyers now pay 5% instead of 12%. Affordable housing buyers pay just 1%. This is a direct saving.
2. Greater demand in housing
   With a lower tax rate, more middle-class families are encouraged to invest in homes. This can revive demand in the housing sector.
3. Simplicity in taxation
   The earlier system of ITC was confusing. Buyers often felt that builders were not passing on ITC benefits. Now, with flat GST rates, pricing is more transparent.

Negative Impacts of the New GST Rate

1. Loss of input tax credit
   Builders cannot claim tax credit on raw materials like cement (28%) and steel (18%). This increases project costs.
2. Possible rise in base price
   To cover the increased expenses, builders may raise the base selling price of flats. This can offset the benefit of lower GST rates for buyers.
3. Challenges for small contractors
   Smaller contractors may find it harder to absorb tax costs, which could affect project delivery timelines.

Impact on Stakeholders

• Home buyers – Gain clarity and reduced tax, but might face higher base prices.
• Builders – Face higher construction costs and reduced profit margins.
• Government – Gains better compliance and less tax evasion due to simplified rules.
• Suppliers – See increased demand but pass higher tax costs to builders.

Practical Example

Suppose a flat costs ₹50 lakh.

• Old system (12% with ITC)
  GST = ₹6 lakh, but builder could offset part of it using ITC. Effective price to buyer ~₹52–53 lakh.
• New system (5% without ITC)
  GST = ₹2.5 lakh, but builder bears extra cost due to no ITC. If builder increases base price by ₹2–3 lakh, effective price may still be around ₹52–53 lakh.

So, the main gain is simplicity and transparency, not always a drastic price cut.

Long-Term Effects

• Affordable housing will benefit most, since 1% GST is very attractive.
• Mid-range and luxury projects may see prices stabilising, not reducing.
• Builders will need better cost management and efficiency to stay competitive.
• Buyers gain more trust in the system, as GST rates are fixed and easy to understand.

Conclusion🎯

The new GST rate in construction is a step towards transparency and affordability, especially for first-time buyers and affordable housing seekers. While it reduces confusion and lowers the upfront tax rate, it also removes the input tax credit, which pushes up costs for builders. The final impact depends on whether builders raise base prices or absorb the cost.

FAQs on GST in Construction

Q1. Do I need to pay GST on ready-to-move-in flats?
No, GST applies only on under-construction properties. Ready-to-move-in homes are exempt.

Q2. What qualifies as affordable housing under GST?
Homes up to 60 sq. metres in metro cities and 90 sq. metres in non-metro areas, within government-defined price limits.

Q3. Can a builder still claim ITC?
No. Under the new 5% and 1% GST rates, ITC is not allowed.

Q4. Is resale property covered under GST?
No. Resale properties attract only stamp duty and registration charges, not GST.

Q5. How does GST affect construction materials?
Since high-tax items like cement and tiles have no ITC, builders face higher costs, which may get added to property prices.