A Practical GST Point Many Builders & Developers Overlook (80-20 Rule) — And End Up Paying For

Brief

This article explains a practical but often misunderstood GST compliance requirement for real estate projects under the concessional GST regime — the 80–20 procurement rule. While most builders focus on input tax credit (ITC) under the 1%/5% scheme, they overlook the statutory procurement condition in GST law. This leads to costly reverse charge liabilities, disrupted project costing and compliance risks.

Introduction

With effect from 1st April 2019, the GST rate structure for real estate projects underwent a major change. Residential real estate projects opting for the concessional GST rates of 1% (affordable housing) or 5% (other residential projects) were subjected to a condition of blocked input tax credit (ITC). Over time, this led to a widespread and dangerous assumption among builders and developers that since ITC is not available, other GST compliance conditions linked to procurement are no longer relevant.

One such condition that is frequently ignored is the requirement to procure at least 80% of construction goods from registered suppliers, commonly referred to as the “80–20 rule”. This misconception often surfaces in statements such as — “We are under the new GST scheme, ITC is not available anyway, so why worry about the 80–20 rule?” While the reasoning may appear logical at first glance, it is legally incorrect and has resulted in significant tax demands during audits.

The 80–20 rule is not connected to ITC eligibility. It is an independent statutory compliance requirement applicable to under‑construction real estate projects. Failure to comply attracts GST under the reverse charge mechanism (RCM), payable entirely in cash and without ITC benefit, thereby increasing project cost and affecting cash flows. This article explains the legal framework, practical computation, common pitfalls, relevant judicial principles and compliance strategy in a simple and practical manner.

“In practice, many developers realise the relevance of the 80–20 rule only when it appears for the first time in an audit objection or draft assessment order.”

1. Legal Basis of the 80–20 Procurement Rule

The requirement to procure a minimum percentage of construction goods from registered suppliers arises from the charging provisions of the GST law and the rate notifications applicable to real estate projects.

The relevant legal provisions are:

• Section 9(3) of the  Central Goods and Services Tax Act, 2017, which empowers the Government to notify supplies on which tax shall be paid under reverse charge.
• Section 9(4) of the CGST Act, 2017, which provides for reverse charge on supplies received from unregistered persons by notified classes of registered persons.
• Notification No. 11/2017-Central Tax (Rate) dt. 28.06.2017, as amended by subsequent notifications effective from 1 April 2019, prescribing concessional GST rates for residential real estate projects subject to conditions.

Under the above framework, promoters opting for the concessional rate are required to ensure that at least 80% of the value of construction goods is procured from registered suppliers. Where such procurement falls short, GST is payable on the shortfall under reverse charge at the applicable rate.

It is important to note that this requirement flows from the levy mechanism itself and not from the input tax credit provisions contained in Chapter V of the CGST Act.

2. ITC Restriction Versus Procurement Compliance

Under the concessional GST scheme:

• ITC on goods and services used in residential real estate projects is blocked, subject to limited exceptions.
• However, the obligation to comply with procurement-related conditions remains fully applicable.

The GST law clearly distinguishes between eligibility to claim credit and liability to pay tax. Even where ITC is not available, tax liability under reverse charge can still arise. Courts have consistently held that conditions attached to exemption or concessional rate notifications must be strictly complied with.

3. What Forms Part of the 80–20 Calculation

Goods and Services used directly in construction activity are relevant for computing the 80% procurement requirement.

Goods included in the calculation:

• Cement
• Steel
• Bricks
• Sand and aggregates
• Tiles, marble and granite
• Sanitary fittings
• Electrical materials used in construction
• Directly attributable services

These goods form the core construction input basket and must predominantly be procured from registered suppliers.

Items excluded from the calculation:

• Land or land development rights
• Transfer of Development Rights (TDR) or Floor Space Index (FSI)
• Long-term lease premium payable to local authorities
• Salaries, wages and labour payments
• Interest on loans
• Stamp duty and registration charges
• Depreciation and provisions
• Electricity, diesel, petrol and fuel

In practice, the builder often includes items that are not covered, or sometimes leaves some items which are covered. The above is not an exhaustive list, but a reference that can been used a guidance.

4. Two Practical Tests for Classification

Before including any expense in the 80–20 computation, two questions should be examined:

i. Is the expense directly related to construction activity?

ii. Does the item qualify as “goods” under GST law?

If the answer to either question is in the negative, the expense should be excluded. This simple test resolves most classification disputes at the project level.

5. Project–Wise Nature of Compliance

The 80–20 rule applies strictly on a project-wise basis and not at the firm or entity level.

Accordingly:

• Shortfall in one project cannot be adjusted against excess compliance in another project.
• Each under‑construction project must independently meet the 80% requirement.

Although compliance is reviewed on a financial year basis, liability is always computed project-wise. This aspect becomes critical for developers executing multiple RERA-registered projects under a single legal entity.

6. Practical Illustration

A developer is executing an under‑construction residential project during FY 2024–25 under the 5% GST scheme.

Total value of construction goods used during the year: ₹10,00,00,000

Procurement from registered suppliers: ₹7,20,00,000

Procurement from unregistered suppliers: ₹2,80,00,000

Minimum required procurement from registered suppliers (80%): ₹8,00,00,000 Shortfall: ₹80,00,000

GST payable under RCM:

₹80,00,000 × 18% = ₹14,40,000

This amount must be paid in cash and is not eligible for ITC, thereby becoming a direct project cost.

7. Consequences of Non–Compliance

Non‑compliance with the 80–20 rule results in:

• Reverse charge GST liability at 18%
• Cash outflow without credit benefit
• Increased project cost and reduced margins
• Exposure to interest and penalty during audit proceedings

In many cases, such liability is detected only during departmental or statutory audits, leaving no scope for commercial recovery.

“Once reverse charge liability is triggered, the tax becomes a sunk cost with no commercial or contractual recovery mechanism.”

8. Capital Goods and Machinery

Capital goods and machinery are excluded from the 80–20 calculation and therefore do not impact the procurement ratio. However, if such goods are procured from unregistered suppliers, reverse charge may still apply and ITC would remain blocked under the concessional scheme.

Conclusion

The 80–20 procurement rule is a statutory GST compliance requirement independent of ITC eligibility. Builders and developers operating under the concessional GST regime must recognise that blocked ITC does not translate into relaxed compliance. Regular project-wise monitoring of procurement, correct classification of expenses and timely review of supplier registration status are essential to avoid costly reverse charge liabilities. The 80–20 rule is not merely a computational formality but a compliance discipline that directly impacts project profitability.