Government Supplies under GST: Complete Guide to Taxability, Exemptions, RCM and TDS

Government transactions are common in India. A contractor builds a road for a State department. A vendor sells computers to a municipal body. A company pays rent, licence fee or royalty to a government office. A consultant provides services to a Panchayat or Municipality.

Each case needs a GST check.

Many people think that every transaction with Government is exempt from GST. This is not correct. Under GST, Government can be a supplier, recipient, registered person and TDS deductor. So, every contract with Government must be checked for tax, exemption, reverse charge and TDS.

1. Why Government Status Matters under GST

The first step is to identify the exact status of the body involved.

Under GST, the following terms have separate meanings:

• Central Government
• State Government
• Union Territory
• Local authority
• Governmental Authority
• Government Entity
• Public Sector Undertaking

A local authority includes bodies such as a Panchayat, Municipality, Municipal Committee, Zilla Parishad, District Board and Cantonment Board.

This point is important. A board, corporation, development authority or government company does not become Government just because it was created by law. It has a separate legal identity.

So, before deciding GST treatment, first ask this question:

Is the body Government, local authority, Governmental Authority, Government Entity, PSU or some other legal body?

The answer decides taxability, exemption, reverse charge and TDS.

2. Are Government Transactions Taxable under GST?

GST is charged on taxable transactions of goods or services. If a transaction is outside GST or covered by an exemption, tax is not charged.

Government and local authorities are treated as “persons” under GST. Activities done by Government as a public authority are also covered under the meaning of business. This means services by Government can come under GST.

Some activities remain outside GST. For example, services by courts and tribunals established under law are outside GST. Functions performed by Members of Parliament, Members of State Legislatures, Panchayats and Municipalities are also outside GST in covered cases.

Penalties for breach of law, such as traffic fines, are not treated as consideration for a service. A fine is a punishment for violation of law. It is not a fee for a service.

There is also a special rule for grant of liquor licence by a State Government. It is treated as neither goods nor services. But this rule does not cover every licence or permission. Fees for mining rights, natural resources, commercial permissions, royalty, lease rights and similar rights need a separate GST check.

3. GST on Services Provided by Government

Services provided by Central Government, State Government, Union Territory or local authority can be exempt or taxable, based on the nature of service.

Some services by Government are taxable. These include:

• Services by Department of Posts and Ministry of Railways
• Services linked to aircraft or vessels at ports or airports
• Transport of goods or passengers
• Services supplied to business entities, unless an exemption covers them

For example, if a business pays licence fee, royalty, lease rent or permission charges to a government department, GST treatment must be checked. The payment does not become exempt just because it is paid to a government office.

4. Reverse Charge Mechanism on Government Services

Reverse Charge Mechanism, or RCM, means the recipient pays GST instead of the supplier.

In government transactions, RCM has an important role. Services provided by Central Government, State Government, Union Territory or local authority to a business entity are taxed under RCM, except services kept out of that entry.

Renting of immovable property by Government or local authority to a registered person is also covered under RCM. For example, if a registered business takes land, office, shop or building on rent from a government body covered by the entry, the registered business must pay GST under reverse charge.

Some goods transactions also need RCM review. Sale of old goods, used vehicles, seized goods, confiscated goods, waste and scrap by Government or local authority to a registered person can attract RCM where the notification covers the case.

RCM is important because the recipient has to pay tax, report it and claim input tax credit where permitted.

5. Exemptions for Services Provided to Government

Exemptions are common in government projects, but they are condition-based. A contract is not exempt just because the recipient is Government.

One important exemption covers pure services provided to Central Government, State Government, Union Territory or local authority in relation to functions entrusted to a Panchayat under Article 243G or a Municipality under Article 243W of the Constitution.

Pure services mean services without goods. Works contracts and contracts involving goods do not fall under this pure service exemption.

For example, manpower for sanitation, public health support or civic services can qualify where all conditions are met.

Another exemption covers composite contracts of goods and services where the value of goods does not exceed 25% of the total contract value. This also needs a link with Panchayat or Municipality functions and a covered government recipient.

Training services to Central Government, State Government or Union Territory administration are exempt where 75% or more of the cost is borne by such Government. Legal services by advocates and services by arbitral tribunals to specified government recipients are also exempt.

Before claiming exemption, check three points:

• Who is the recipient?
• What is the exact nature of service?
• Does the service relate to Panchayat or Municipality functions?

If one condition fails, exemption does not apply.

6. GST on Government Contracts and Works Contracts

Government contracts often involve construction, repair, maintenance, manpower, equipment, material or professional services. These contracts need close review.

A works contract under GST is treated as a service. But that does not mean every works contract for Government is exempt.

For example, a pure labour contract for sanitation has different GST treatment from a construction contract involving cement, steel and other materials. A road project, drain project, building contract, water system or repair contract must be checked under the relevant GST rate and exemption entry.

Where a contract includes both goods and services, the value of goods becomes important. If the goods value crosses the allowed limit under an exemption entry, GST exemption fails. The supplier must then charge GST at the correct rate.

7. GST Registration and Invoicing

A government department or local authority needs GST registration when it makes taxable supplies or when it is required to deduct TDS under GST.

A person required to deduct TDS under section 51 must take registration as a TDS deductor. This rule has no turnover limit. Registration can be obtained using TAN.

If the person already has GST registration as a supplier, separate TDS registration is still required.

Invoicing also needs care. A tax invoice is required for taxable transactions. A bill for exempt supply is used where GST is not charged.

Where RCM applies and the supplier is unregistered, the recipient must issue a self-invoice. From 1 November 2024, a person registered for TDS alone is treated as an unregistered person for this self-invoice rule.

Government departments and local authorities are exempt from e-invoicing. But a private supplier crossing the e-invoice turnover limit must issue an e-invoice for B2B transactions with registered government recipients.

8. TDS under GST on Government Payments

TDS under GST is covered under section 51 of the CGST Act. It requires specified deductors to deduct tax from payment made or credited to the supplier of taxable goods or services.

TDS is required where the taxable value under a contract exceeds Rs. 2,50,000. This value excludes GST and cess shown in the invoice.

The TDS rate is:

• 1% CGST plus 1% SGST or UTGST for intra-State transactions
• 2% IGST for inter-State transactions

TDS is not required on exempt or nil-rated transactions.

Deductors include government departments, local authorities, government agencies, notified boards or authorities, societies set up by Government or local authority, public sector undertakings and notified persons.

From 10 October 2024, registered persons receiving metal scrap under Chapters 72 to 81 from another registered person are also covered under GST TDS.

There is one important exception. TDS is not required where the location of the supplier and the place of supply are in a State or Union Territory different from the State or Union Territory of registration of the recipient. This rule prevents wrong deduction in certain cross-State transactions.

9. GSTR-7 and TDS Certificate

The deductor must deposit GST TDS within 10 days after the end of the month in which deduction is made.

The deductor must file Form GSTR-7 by the tenth day of the next month. From 1 November 2024, a TDS deductor must file GSTR-7 for every calendar month, even when no deduction is made in that month.

The TDS certificate is available to the supplier in Form GSTR-7A on the GST portal. The supplier can accept the TDS credit and use it through the electronic cash ledger.

This system helps the supplier get credit for the tax deducted from payment.

10. Interest, Late Fee and Penalty

If a deductor deducts GST TDS but does not deposit it on time, interest applies.

Late fee is also charged for delay in filing GSTR-7, subject to the prescribed limit. For months with no deduction, late fee has been waived from 1 November 2024.

If TDS is not deducted, short deducted or not paid after deduction, penalty provisions apply. The penalty can be Rs. 10,000 or the tax amount involved, whichever is higher.

Government offices, PSUs and other deductors must treat GST TDS as a strict compliance duty.

11. Simple Compliance Checklist

Before billing or making payment in a government transaction, check these points:

• Identify the exact status of the body.
• Check whether the transaction is taxable, exempt or outside GST.
• See whether the contract includes goods, services or both.
• Check whether the service relates to Panchayat or Municipality functions.
• Decide whether GST is under forward charge or RCM.
• Check whether GST TDS under section 51 applies.
• Use the correct invoice or bill.
• File GSTR-7 where TDS is deducted or required to be reported.

This basic check can prevent wrong tax treatment, payment delays and audit issues.

Conclusion

GST on government supplies needs a contract-wise approach. A transaction is not exempt just because one party is a government office. The correct treatment depends on the legal status of the body, nature of goods or services, exemption entry, RCM notification and TDS rule.

For contractors and vendors, GST review must happen before quoting, billing and receiving payment. For government offices, the focus must be on correct TDS deduction, deposit and reporting.

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates