1. Why this issue matters
When you set up a new factory, the civil contractor usually quotes a lump-sum BOQ covering concrete, structural steel, embedded plant foundations, on-site diesel for machinery, security wages, project insurance, etc.
Because diesel (still outside GST) and direct wages (neither goods nor services) technically attract 0 % GST, owners often ask:
“If the contractor simply gets reimbursed for diesel and salaries, why should we pay 18 % GST on them?”
At first glance the idea of raising two separate invoices—(a) pure works-contract, (b) “reimbursables-at-actuals, no GST”—looks tempting. Yet the law rarely permits it. This article explains all the moving parts, the latest circulars (up to Circular No. 241/35/2024-GST, 31 Dec 2024) and court trends, and highlights the narrow situations where an exclusion can safely work. The aim is to give both finance teams and lay readers a 360° view.
2. Statutory building-blocks
| Provision | Essence | Take-away |
|---|---|---|
| §2(119), CGST Act | “Works contract” = construction, repair or installation of immovable property | Every civil/EPC contract for a plant is a service, taxed at the works-contract rate (usually 18 % or 12 % for certain Govt contracts). |
| §15(1) (transaction value) + §15(2)(c) (incidental charges) | Tax is on the price actually paid or payable, plus any amount the supplier recovers “before, during or after” the supply | Once diesel, wages, etc. are recovered through the same milestone bill, they automatically inflate the taxable base. |
| Rule 33 – “Pure-agent” exclusion | Lets you strip out a cost if the supplier merely acts as agent of the recipient and satisfies all eight conditions (authorisation, disclosure, no markup, third-party invoice in recipient’s name, etc.) | |
| Composite-supply principle | Even separately-shown items get merged with the principal supply when they are “naturally bundled” (CBIC Circular 206/18/2023-GST clarified this for electricity while renting) CBIC GST |
3. Why diesel & site-salaries seldom qualify as “pure-agent” costs
Below is a reality-check against Rule 33’s tests:
| Rule 33 condition | Diesel for earth-moving equipment | Contractor’s own labour / salaries |
|---|---|---|
| (a) Written authorisation to incur cost as agent | Usually missing; BOQ treats diesel as contractor’s input | Not applicable – labour is an internal cost |
| (b) No title / no personal use | Diesel is burned by the contractor ⇒ personal use | Contractor “uses” labour for executing work |
| (c) Expense paid to third party on recipient’s behalf | Paid to petrol bunk by contractor, not by recipient | Staff are on contractor’s rolls, not third party |
| (d) Cost recovered at actuals, no markup | Often estimated or loaded with handling charge | Not at cost; part of margin on total price |
| Net result | Fails → must be included in taxable value | Fails → must be included in taxable value |
Judicial mood is equally stiff. A recent High Court order on free diesel provided to transporters allowed exclusion only where the contract explicitly put fuel liability on the recipient and transporter never pocketed it . That scenario is the exception, not the rule.
4. Latest clarifications & trends (2024–2025)
- Circular 241/35/2024-GST (31 Dec 2024) – re-emphasises that Input-Tax Credit (ITC) remains available on goods delivered under ex-works contracts only when invoices bear the buyer’s GSTIN and physical receipt is evidenced. The circular indirectly underlines the importance of document trails whenever ownership of inputs is claimed by the project owner.
- Sectoral audits: FY 2022-23 & 2023-24 GST audits have begun scrutinising valuation of large EPC packages—particularly splitting of “diesel, electricity, insurance” lines. Many notices are being issued under §74 for under-valuation.
- Industry practice: Leading PSU tenders (e.g., oil & gas pipelines) now explicitly state that fuel, electricity and water supplied free by owner must still be added to taxable value, reducing room for creative structuring.
5. ITC implications – Think beyond the headline tax
| Asset category | Is GST credit admissible to owner? | Does carving-out diesel help? |
|---|---|---|
| Plant & machinery foundations, reactors bolted to earth, EOT cranes | Yes – §17(5)(c)/(d) bar does not apply | Excluding diesel merely converts credit-neutral tax into extra paperwork; no cash saving. |
| Factory buildings, administrative blocks, roads | No – ITC blocked under §17(5)(c)/(d) | Excluding diesel lowers tax cost but invites valuation risk. |
| Temporary site offices / shuttering materials | ITC admissibility varies (if later removed) | Same as above. |
6. Legitimate structures that can work
- “Free-issue” model
- Owner buys diesel in own GST-registered name, stores it on site.
- Contractor draws from owner’s stock; contract value excludes fuel altogether.
- Result: No GST on fuel because it never forms part of consideration.
Caveat: needs tight inventory controls, daily dip readings, separate tanks.
- True 3rd-party pass-through (rare)
- Contractor books hotel accommodation, inspection fees, local body approvals in owner’s name, pays and recovers at exact cost with voucher bundle attached.
- Fulfils Rule 33; GST excluded.
- Works only for independent, third-party expenses – not for consumables or own labour.
- Dual-contract model
- One contract for pure supply of cement & steel (tax at 18 %).
- Separate labour-only contract taxed at 18 % (service).
- Diesel cost absorbed in the labour contract.
Warning: The department may still club the two under anti-avoidance if they are “artificially split”.
7. Consequences of getting it wrong
| What can happen | Statutory lever | Monetary impact |
|---|---|---|
| Tax demand for differential value | §15 read with §74 | 18 % tax + 18 % interest + 100 % penalty |
| Disallowance of ITC to recipient | §16(2)(aa) & §42 mis-match | Cash flow strain, reversals |
| Prosecution (willful mis-statement) | §132 (>₹5 cr) | Jail up to 5 years |
| Anti-profiteering if project cost remains same but GST is pared down | §171 | Price reduction orders, 10 % penalty |
8. Compliance roadmap for project owners
- Clause it right up-front
- Draft the EPC agreement to clearly allocate who owns consumables.
- Attach an annexure listing “Owner-supplied materials”.
- Insist on transparent invoicing
- Single GST invoice per milestone is safer unless free-issue route is followed.
- If pure-agent lines are inevitable, demand third-party bills in your GSTIN.
- Maintain a parallel fuel ledger & manpower deployment sheets to rebut any future valuation dispute.
- Mirror BOQ in books – map every GST-charged line to a GL head; avoid “Misc. reimbursement” buckets.
- Advance ruling – for mega projects (>₹500 cr), consider seeking a private ruling in your State to lock-in the position.
9. Frequently-asked questions (plain-speak)
Q1. Diesel is outside GST; why should we pay GST on it when billed by the contractor?
Because it is not the diesel per se that is being taxed but the service of executing work. Once the diesel forms part of the price you pay for that service, it inherits the service’s tax rate.
Q2. Can we simply reimburse diesel in cash without invoice?
No. Cash reimbursement without GST invoice breaches §15 disclosure rules and will be treated as suppressed turnover in the contractor’s audit.
Q3. What if the contractor raises two invoices on the same day—one with GST, one without?
Unless Rule 33 is met in letter and spirit (third-party bills, no margin, owner’s name), the tax officer can club them and demand GST on the aggregate.
Q4. Is it worth the trouble when ITC is anyway blocked on buildings?
Often yes, but weigh the litigation cost versus the 18 % tax outflow. For small diesel components (<5 % of contract value) many corporates prefer peace of mind over aggressive structuring.
10. Key take-aways
- Most diesel, wage and similar “non-GST” inputs are inseparable from a works-contract service.
- The lone statutory escape hatch – Rule 33 pure-agent – is narrow and documentary-heavy; routine civil contracts rarely pass.
- Where ITC on the main contract is available, carving out costs delivers zero net saving but adds risk.
- If you truly want a tax-efficient model, switch to an owner-supply/free-issue framework with iron-clad fuel accounting.
- Keep an eye on post-2024 CBIC circulars; the department is tightening valuation scrutiny in infrastructure and manufacturing projects.
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