Many builders have now accepted the 1% and 5% concessional GST rates for housing projects, but still miss a crucial compliance condition: the 80–20 procurement rule. This miss does not just create paperwork issues – it directly triggers reverse charge tax, blocks cash flow, and can wipe out margins when an audit lands on their desk.
What is 80-20 rule in real estate projects & how this rule came in
From 1 April 2019, GST on residential real estate shifted to concessional rates: 1% for affordable housing and 5% for other residential units, subject to blocked ITC and specific conditions. These rates came through amendments to Notification 11/2017‑Central Tax (Rate) via Notification 03/2019‑Central Tax (Rate) and related notifications, which hard‑wired the procurement conditions into the rate itself.
Under this framework, a “promoter” opting for concessional rates must ensure that at least 80% of the value of inputs and input services used in the project is procured from registered suppliers, excluding certain specified items. If this 80% threshold is not met, GST at 18% becomes payable on the shortfall under reverse charge, with a higher 28% rate specifically for cement bought from unregistered suppliers.
ITC block vs procurement conditions
One of the biggest myths in the sector is: “We are under 1%/5% without ITC, so the procurement rule doesn’t matter.” In reality, ITC eligibility and reverse charge liability are two different tracks – the law can block credit and still demand tax under reverse charge for non‑compliance with a concessional scheme condition.
The 80–20 requirement flows from the rate notification, not from the ITC chapter in the CGST Act. Courts in tax cases have repeatedly held that if you choose a concessional rate or exemption, you must strictly follow every condition attached to it, otherwise the tax department is justified in raising demand.
What actually counts in the 80–20 test
The rule looks at inputs and input services used in supplying construction services for the project, excluding capital goods and some specified items. In simple project language, you should include things that directly go into constructing and finishing the building, plus directly linked services.
Typical items that get included for 80–20 purposes (subject to the detailed notification conditions) are:
1. Cement, steel, bricks, sand and aggregates
2. Tiles, marble, granite and other flooring materials
3. Sanitary ware and plumbing materials
4. Electrical cables, switches, panels and similar materials used in construction
5. Architect, structural design, project management and other directly attributable services
6. Many site‑related construction services like works contract services, excavation, shuttering and finishing services
Items that are generally outside the 80–20 computation because they are either capital goods, financial costs or not treated as inputs/input services for this purpose include:
1. Land and land development rights, Transfer of Development Rights (TDR), FSI and long‑term lease premium to authorities
2. Salaries, wages and direct labour payments to employees
3. Interest on loans and other finance costs
4. Stamp duty, registration charges and similar government levies
5. Depreciation and purely accounting provisions
6. Diesel, petrol and other non‑GST fuels used for machinery or generators
7. Capital goods and plant/machinery (though these may still attract reverse charge separately if procured from unregistered persons)
For many developers, errors happen at this stage itself – either by wrongly including land and financial costs or by forgetting several construction services that should be counted while checking the 80% benchmark.
Two quick filters builders should use
Before you load any expense into your 80–20 working, ask yourself two simple questions:
- Is this spend directly linked to the construction or finishing of the units being sold?
- Does it qualify as “goods” or “services” under GST, other than the specifically excluded categories in the notification?
If either answer is “no”, it is safer to keep that line item out of the 80–20 calculation and treat it separately for GST analysis. This basic filter, followed consistently, can prevent most classification disputes when the department reviews your working.
Project‑wise, not entity‑wise compliance
A common mistake in larger developer groups is to look at the 80–20 rule at a company level instead of at an individual project level. The notifications and real‑estate specific rules make it clear that the calculation has to be done project‑wise, usually aligned with each registered real estate project.
This means:
- Extra compliance (say 90%+ procurement from registered parties) in one project cannot be used to compensate a shortfall in another project.
- Every under‑construction project under the concessional regime must independently cross the 80% line for the relevant financial year or till completion/first occupation, whichever is earlier.
For groups running multiple RERA projects in one legal entity, a single missed project‑level working can create a surprise reverse charge bill even if the overall entity procurement looks healthy on paper.
A refreshed practical example (2024–25)
| Particulars | Amount (₹ crore) |
How it is treated for 80–20 rule | Reverse charge implication | Notes for builders |
|---|---|---|---|---|
| Total value of inputs & input services used in the project (FY 2024–25) |
10.00 | Full value considered as the base for 80% requirement | No RCM at this stage (only base for calculating %) | Exclude land, TDR/FSI, long‑term lease premium, capital goods, salaries, interest, stamp duty etc. while arriving at this figure. |
| Purchases from registered suppliers (goods + services) | 7.20 | Counts fully towards 80% registered procurement | No RCM on these supplies (tax already charged by suppliers) | Try to route major construction materials and services through registered vendors to naturally stay above 80%. |
| Purchases from unregistered suppliers (excluding cement) | 2.00 | Included in total inward supplies but does not help in meeting 80% requirement (because suppliers are unregistered) | Subject to RCM @18% on value to the extent there is shortfall below 80% after considering all registered supplies and cement RCM already paid. | Use unregistered vendors only where cost savings are clear even after factoring possible 18% RCM. |
| Cement purchases from unregistered suppliers | 0.80 | Part of total inward supplies, but 80–20 relaxation does not apply to cement – it is always watched separately. | RCM @28% on full ₹0.80 crore (i.e. ₹0.224 crore or ₹22.40 lakh) is payable in cash by the promoter. | Cement from unregistered parties is always risky for cash flow because of higher 28% RCM and blocked ITC under concessional schemes. |
| Minimum procurement required from registered suppliers (80% of ₹10.00 crore) | 8.00 | This is the benchmark value that must be met or exceeded by registered purchases (after considering cement RCM adjustment). | No direct RCM, but drives how much of unregistered portion will suffer 18% RCM. | Always compute this figure project‑wise and at least once every financial year (preferably quarterly) to avoid last‑minute surprises. |
| Actual purchases from registered suppliers | 7.20 | Falls short of 80% benchmark by ₹0.80 crore (8.00 – 7.20). | Unregistered portion (other than cement) up to this shortfall is liable to RCM @18%. | Shortfall here directly converts into RCM liability and hits project cost because ITC is usually not available under 1% / 5% schemes. |
| Shortfall for 80% requirement (before adjusting cement RCM) | 0.80 | Represents value by which registered purchases are lower than mandated 80%. | After paying RCM on cement at 28%, the remaining shortfall attributable to other unregistered purchases is taxed @18% under RCM. | In practice, department checks this working carefully in audits; proper documentation of how shortfall and RCM are computed is essential. |
| RCM on cement from unregistered suppliers | 0.224 | Reduces the effective unregistered component considered for general 18% RCM calculation as per notification illustrations. | Must be paid in cash and usually cannot be taken as ITC under concessional schemes. | Pay this in time to avoid interest; link payments to project‑wise ledger for easier reconciliation. |
| RCM on other unregistered purchases (shortfall portion) | 0.144 (18% of ₹0.80 crore, assuming full shortfall is on other unregistered purchases) | Applies after checking how much of unregistered inward supplies (other than cement) fall into the shortfall below 80%. | 18% RCM becomes additional cost to the project where ITC is blocked under 1% / 5% rates. | Even if absolute amount seems small, combined impact across multiple years and projects can materially erode margins. |
| Net impact on project cash flow under concessional scheme | 0.368 crore (₹0.224 crore + ₹0.144 crore) RCM paid – with no usable ITC | RCM outflow is not offset by input tax credit, so it behaves like a pure cost item in project budgeting. | Higher working capital requirement and lower effective profit per unit unless priced into the selling rate. | Builders should factor expected RCM cost into feasibility studies and sale pricing from the beginning of the project. |
Under the current notification structure:
GST on cement purchased from unregistered persons is payable at 28% under reverse charge on the entire ₹8.00 crore.
On any remaining shortfall subject to the general 18% rate, GST at 18% is payable under reverse charge.
All such reverse charge tax has to be paid in cash and the promoter cannot claim ITC for it under the 1%/5% concessional scheme, so the entire amount becomes a straight cost to the project.
What happens if you ignore the rule
When the 80–20 condition is not met and the differential tax is not paid, the promoter exposes the project to several risks:
- Reverse charge GST demands at 18% (and 28% on cement) on the shortfall.
- Interest liability from the due date of payment till the date of actual payment.
- Penalties and possible denial of concessional rate if conditions are treated as violated in a serious manner.
- Higher effective project cost and squeezed margins, with very limited scope to recover the extra tax contractually from buyers once flats are sold and agreements are registered.
In practice, this often surfaces during departmental audits, GST assessments or lender‑driven reviews, by which time the project is nearing completion and there is almost no way to commercially pass back the additional cost.
Capital goods and machinery: a separate angle
Capital goods like tower cranes, batching plants, lifts and major site machinery are not counted while testing the 80% procurement requirement because the rule is framed for inputs and input services. However, buying such capital goods or machinery from unregistered suppliers can still trigger reverse charge where notified, and any GST paid may remain blocked under the concessional scheme.
So, while capital goods don’t affect the 80–20 ratio, sloppy planning here can still bring in cash‑drain through reverse charge and non‑creditable tax, again hurting project cash flows.
Recent context: GST 2.0 and real estate
With the rollout of “GST 2.0” from late 2025, discussions have focused mainly on the new two‑rate structure (5% and 18%), greater digital monitoring and streamlined ITC rules. For real estate, affordable housing at concessional rates continues to be encouraged, while ready‑to‑move properties with completion certificates remain outside GST as sale of immovable property.
However, the basic philosophy around concessional rates for under‑construction residential projects remains the same: lower nominal GST rate, no or limited ITC, and strict conditions like the 80–20 rule and reverse charge responsibilities on promoters. As automation and data‑matching improve under GST 2.0, project‑wise procurement patterns are becoming easier for authorities to scrutinize, which makes casual treatment of the 80–20 rule even more risky.
Simple compliance playbook for builders
To stay safe under the 80–20 rule while enjoying concessional rates, builders and developers can follow a practical, checklist‑style approach:
1. Track each project separately: Maintain project‑wise purchase registers segregating registered and unregistered supplies, and separate out excluded items like land and capital goods.
2. Tag vendors clearly: Mark suppliers as registered, unregistered and reverse‑charge‑covered to avoid wrong classification during year‑end working.
3. Review quarterly, not annually: Run the 80–20 ratio every quarter so you can course‑correct procurement patterns in time instead of discovering a large shortfall at year‑end.
4. Watch cement and key materials: Avoid regular cement purchases from unregistered parties because of the higher 28% RCM rate, unless there is a compelling price advantage even after tax.
5. Document your workings: Keep signed working papers, CA‑verified computations where needed, and clear notes on inclusions/exclusions so that your logic is easy to defend in an audit.
For most developers, the 80–20 rule is no longer a “new” concept, but in 2026 it still remains a silent profit‑killer whenever it is treated as a mere formality instead of a core part of GST planning for every project.
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