The 80:20 rule: the procurement test builders discover at year end

Short answer: a residential promoter on the concessional rates must source 80% of inputs and input services from registered suppliers, tested across the financial year. Shortfall attracts 18% reverse charge. Cement from an unregistered supplier is charged regardless of the test. Nothing in your monthly returns will tell you where you stand.

The condition, and why it exists

The 1% and 5% residential rates come without input tax credit. That removes the promoter's incentive to buy from registered suppliers — with no credit to lose, an unregistered supplier quoting less is simply cheaper.

The 80% rule closes that. It makes registered procurement a condition of the concessional rate rather than a commercial preference. Fall below it and the shortfall is taxed at 18% under reverse charge, which restores roughly the tax that leaked out of the chain.

Understanding it as a condition rather than a penalty helps, because it explains why the arithmetic is unforgiving and why there is no reasonable-cause relief.

The timing problem

This is the whole practical difficulty.

The test runs across a financial year. It does not appear in GSTR-1 or GSTR-3B. No monthly return computes it, discloses it, or warns about it. A project can spend eleven months well below 80% with nothing anywhere indicating a problem.

The shortfall becomes computable only after the year has closed — at which point the procurement that would have cured it can no longer be made. The liability is then fixed, and the only remaining question is whether it gets declared or found.

The rule is therefore a tracking obligation, not a filing one. Promoters who manage it well compute a running position monthly against a target and shift procurement while shifting it still changes the answer. Promoters who manage it badly discover it during the annual return.

Cement is a separate problem

Cement does not play by the 80% test.

Any cement purchased from an unregistered supplier attracts reverse charge in the promoter's hands — no threshold, no proportionality, and no set-off against a comfortable margin elsewhere in the project. A promoter at 92% registered procurement overall still owes on every rupee of unregistered cement.

The rate is 18%. This is worth stating plainly because a great deal of published guidance still says 28% — that was the rate cement carried when the rule was framed, and GST 2.0 moved cement to 18% from 22 September 2025. The reverse charge follows the rate on the goods, so it moved with it.

Ten percentage points on a builder's largest single input is not a rounding difference. A promoter still provisioning at 28%, or an adviser still quoting it from older material, is working from a rate that has not applied since September 2025.

What sits outside the computation

Getting the denominator wrong is as common as getting the numerator wrong.

The test covers inputs and input services used in supplying the project. Several significant items are dealt with under their own reverse-charge treatment rather than entering this calculation — notably transfer of development rights, floor space index, and long-term lease premiums. Sweeping those into the 80% working distorts the ratio, sometimes flattering it and sometimes not.

A working that has never been reviewed is as likely to be overstating compliance as understating it.

Where the notices come from

Departmental checking here is mechanical rather than investigative. The department already holds project data from other filings, including what has been declared to RERA. A project reporting substantial construction activity that has never declared any reverse-charge liability under this head is a visible pattern, not something that has to be uncovered.

See RERA filings vs GST returns for how that comparison is actually run.

A practical checklist

1. Is the 80% position being computed monthly, project by project, or only at year end?
2. Is supplier registration status captured in the purchase ledger at the time of purchase — and re-verified, since registrations get cancelled?
3. Is cement tracked separately from the main test?
4. Are TDR, FSI and lease premiums correctly excluded from the ratio?
5. Is the test being applied project-wise, as required, rather than entity-wide?

The fifth catches multi-project developers most often. A strong position on one project does not rescue a weak one on another; each project stands alone.

For what else falls due when the project completes, see unsold inventory at the completion certificate.

The 80% condition only bites on a project inside the 1%/5% scheme. Whether yours is, and what that does to a shop in the same building, is in RREP or REP.

This is a working reference, not the statute. For anything you are relying on, confirm the notification text directly.