APPLICABILITY OF

SERVICE TAX IN
CONSTRUCTION
INDUSTRY
CA Ashok Batra
Special Invitee, Indirect Taxes Committee

Services provided by a
Developer/Contractors
(1) Services by way of Construction and Sale of
flats/units in a complex.
(2) Services by way of Works Contracts
(3) Services by way of Renting of Immovable Property
(4) Services by way of maintenance of a
Complex/Building

Entries of Declared List governing

Construction/Builders Services (Section 66E)
(a) Renting of immovable property;
(b) Construction of a complex, building, civil structure or a
part thereof, including a complex or building intended
for sale to a buyer, wholly or partly, except where the
entire consideration is received after issuance of
completion-certificate by the competent authority;
(h) service portion in the execution of a works contract;

Renting of Immovable Property

Service:
Negative List of services (Section 66D):
(m) services by way of renting of residential dwelling for use
as residence;

EXEMPTIONS PROVIDED TO
BUILDER/CONTRACTOR UNDER
NOTIFICATION NO. 25/2012 DATED
20.06.2012

Construction Service: Various Exemptions

Services provided to
Government/ Local
Authority/ Governmental
Authority (Entry No 12)

Services provided to any

Person (Entry No 13)

Services by way of Construction,

Completion, Fitting out, repair,
maintenance,
renovation,
alteration in respect of:

Services by way of Construction,

Completion, Fitting out, repair,
maintenance,
renovation,
alteration in respect of

Civil Structure for Non-Commercial

Purpose.
Historical Monument etc.
Structure for use as clinical,
educational, or cultural
establishment
Canal, Dam Etc.
Pipeline, Conduit Etc.
Residential Complex for self of
employees of above

Road, Bridge, Tunnel etc.

Civil Structure under Jawaharlal Nehru
National Urban Mission or Rajiv Awaas
Yojana
A building owned by entity registered
under Section 12AA of Income Tax Act,
1961
A pollution Control plant
Structure for burial, funeral etc.

Services provided to any person by way of construction,

erection, commissioning or installation pertaining to
(Entry No 14):

Airport, port & railways (including monorail & metro)

Single residential unit otherwise as a part of residential complex
Low-cost houses up to a carpet area of 60 sq metres.
Post-harvest storage infrastructure for agriculture produce
Mechanised food grain handling system, machinery, or equipments
for units processing agricultural produce.

Services of Works Contract provided by a SubContractor to another contractor providing Works

Contract services which are Exempt from Service Tax
[Entry No 29 (h)]

Exemptions available to Renting of Immovable Property

Service vide Notification No 25/2012 dated 20.06.2012

Renting of precincts of a religious place meant for general

public (Entry No 5).
Renting of a premises for the conduct of Religious Ceremony
(Entry No 5).
Renting of Immovable Property to an Educational Institution
providing education which is exempted from Service Tax
(Entry No 9).
Renting of a hotel, inn, guest house, club, campsite or other
commercial places meant for residential or lodging purposes,
having declared tariff of a room below rupees one thousand
per day or equivalent (Entry No 18).

Charges collected by Builders and rate of Service

Tax applicable on said charges
S.N
o

Charges

1.

Basic Charges

2.

Preferential Location
Charges

3.

Club Charges
Towards
cost
of
construction
For membership of club
Provision of Food/other
services

4.

Car Parking- open &

covered

Rate of Service tax

3.09%/3.708%
12.36%

3.09%/3.708%
12.36%
NIL/12.36%
3.09%/3.708%

S.No

Charges

Rate of Service tax

5.

EDC/IDC
On Actual Payment Basis
Not Taxable
On Adhoc basis without
Full amount is Taxable
disclosing actual charges
Actual Charges plus own Only own service charges are
service charge
taxable

6.

External Electrification
charges/ Electrical Installation
Charges

7.

Administrative
registration

8.

Interest Free Maintenance

Security (IFMS)
Refundable

Charges

Non Refundable

for

3.09%/3.708%/4.944%

12.36%

Non Taxable
Taxable @12.36%

S.N
o
9.

Charges

Rate of Service tax

Firefighting Equipment
Installation charges

3.09%/3.708%/4.944%

10.

Power Backup Charges

(Towards cost of installation
of DG Sets and substations)

3.09%/3.708%4.944%

11.

Administrative/Transfer
Charges (In case of sale of
flat by original buyer,
builder charge said charged
for modifying its records
i.e. entering the name of
new buyer in its records)

12.36%

Maintenance Services provided by a

Developer/Builder
Apart from construction Services developers/Builders also provide
the services of maintenance of buildings/complexes constructed by
it. For providing such services developer charges maintenance
charges form the occupants of flats/offices. The nature of charges
collected by builders and Rate of Tax applicable on the same has
been summarised as under:
Charges

Description

Maintenance
Towards maintenance
Mai
Maintenance Charges
Charges
building/complex

Taxability
of

12.36%

Electricity Charges

For supplying electricity in

flats/shops
(Charged
on
actual basis)

Non
Taxable

Common Area
Electricity Charges

Towards cost of electricity

consumed in Common Area

12.36%

Impact of Negative List Regime

Construction for NGO/ Charitable Institutions made taxable

Renting for NGO/ Charitable Institutions made taxable
Services in relation to development of plots provided by
builders made taxable
Changes in the definition of Residential Complex
Scope of entry no. 12 of Notification No. 25/2012 dated
20.06.2012

CASE STUDIES

Case Study-1

ABC ltd has entered into a contract for construction of road

meant for general public. ABC ltd sub contracts the aforesaid
work to three contractors namely:

DEF Ltd , the work of site formation for construction of road

XYZ Ltd , laying the surface of road
GHI Ltd , other physical activities in respect of such roads.

What will be the Service tax implication on the aforesaid

transactions?

 Services provided by way of construction of road meant for

use by general public is Exempted from payment of Service
Tax. Thus, any service which is used in the construction of
said road shall be exempted from Service Tax as per Entry
13(a) of N/N 25/2012 dated 20.06.2012. Accordingly, all
the aforesaid services in respect of roads are not exigible to
Service Tax.
Further, as far as laying of surface is concerned same is also
covered under definition of Works Contract as engrafted
under Section 65B (54) of Finance Act, 1994. Since, main
Contractor enjoys exemption, the sub contractor also
continue to enjoy the exemption in respect of Works Contract
Services - Entry 29(h) of N/N 25/2012 dated 20.06.2012

Case Study-2

M/s ABC Pvt Ltd is engaged in construction of

educational institutes. Whether M/s ABC Pvt Ltd.
pay Service Tax on the same?

hospitals and
is required to

If M/s ABC Ltd is constructing such structures for the government, a

local authority or a governmental authority, in that case M/s ABC is
not required to pay Service Tax on the same as per Entry 12 (a) of
Notification No 25/2012.
However, if such structure are built for persons other than
government, a local authority, governmental authority, M/s ABC Ltd
is required to pay Service Tax on the same.

Case Study-3

M/s XYZ
Whether
same?

Pvt Ltd is engaged in maintenance & Repair of Ports.

M/s ABC Pvt Ltd. is liable to pay Service Tax on the

Yes, M/s XYZ Pvt Ltd is required to pay Service Tax on the same as
vide Entry No 14 of Notification No 25/2012 dated 20.06.2012,
exemption has been provided only to services in respect of
Construction of Ports.

Case Study-4

M/s XYZ Pvt Ltd is Renting out

NGO. Whether M/s XYZ Pvt Ltd is
the same?

its Immovable Property to

required to pay Service Tax

an
on

Yes, M/s XYZ Pvt Ltd is required to pay Service Tax on the same as
exemption has not been granted to such activity anywhere under
Finance Act, 1994.

Case Study-5
Mr. A has rented a house to Mr. B, consisting of two floors. one
floor of which is to be used as residence and the other for the
purpose of running of a office? What shall be the Service Tax
implications on the same?

Such renting for two different purposes is not naturally bundled in the
ordinary course of business. Therefore if a single rent deed is
executed it will be treated as a service comprising entirely of such
service which attracts highest liability of Service Tax. In this case
renting for use as residence is a Negative List Service while renting
for non-residence use is chargeable to tax. Since, the latter category
attracts highest liability of Service Tax amongst the two services
bundled together, the entire bundle would be treated as renting of
commercial property.

Case Study-6
Mr. A has let out a house to Mr. B for Residential purposes.
Further, along with such house Mr. A has also provided various
amenities such as furniture, refrigerator, air conditioners etc.
What shall be Service tax implications of the same?

This will be a case of Bundled Services where a number of services

have been provided in lieu of a Single Consideration. Accordingly,
taxability of the same shall be determined as per Section 66F of
Finance Act, 1994. As per said Section, if services are considered
Naturally Bundled in the ordinary Course of business, it shall be
considered as the provision of said service which provide essential
character to it. In this case, Renting of Immovable Property is the
essence of aforesaid activity. Further, Renting of property for
residential purposes is not exigible to Service Tax. Thus, said activity
of Renting by Mr. A shall not be exigible to Service Tax.

VALUATION ASPECTS IN RELATION TO

CONSTRUCTION SERVICES

Valuation in respect of Works Contract Services

SERVICE TAX (DETERMINATION OF VALUE), RULES,
2006:
RULE 2A, Determination of value of service portion in
the execution of a works contract :
Clause(i): Taxable Value shall be Gross Amount Charged
[excluding VAT/Sales Tax paid / payable on transfer of property in
goods involved in execution of works contract] for the works
contract service less the value of transfer of property in goods
involved in the execution of the said works contract.
As per said Rule labour charges, amount paid to sub-contractors,
charges for planning, designing etc, cost of consumables, cost of
establishment of the contractor, and other similar expenses in
relation to supply of labour are required to be included in the Gross
Amount Charged.

(ii) In case the value cannot be determined under clause (i)

above, then taxable value shall be determined as follows:

S.No
.

PURPOSE OF WORK
CONTRACT

PROPORTION OF THE
TOTAL AMOUNT ON
WHICH SEVICE TAX IS
PAYABLE

1.

For execution of original works

40%

2.

works
contracts,
including
maintenance,
repair,
completion
and
finishing
services of an immovable
property

60%

3.

Maintenance
or
repair
or
reconditioning or restoration or
servicing of any goods

70%

Valuation in respect of Builders Services

LABOUR CONTRACTS for Construction of a complex, building,
civil structure or a part thereof
Value of Service =

Gross Amount Charged

(Rate of Service Tax : 12.36%)

Contract for Construction of complex or building intended for sale

to a buyer, wherein consideration is received from buyer
partly or wholly prior to Issuance of Completion Certificate
by a Competent Authority
Value of Service = Gross Amount Charged * 25%/30%
(Rate of Service Tax : 3.09% / 3.708%)
(N/N.- 26/2012 dated 20.06.2012 s amended vide N/N-2/2013
dated 01.03.2013 and N/N-9/2013 dated 08.05.2013)
Continued.

Valuation in respect of Builders Services

Percentage and Conditions for abatements
Construction of a complex, building, civil structure or a part thereof,
intended for a sale to a buyer, wholly or partly except where entire
consideration is received after issuance of completion certificate by the
competent authority,
W.e.f 01.3.2013
Abatement of 75 %
(i) For residential unit having carpet area upto 2000 square feet and
where the amount charged is less than rupees one crore
Abatement of 70%
(ii) For other than (i) above
From 01.07.2012 to 28.02.2013
Abatement of 75 %
CONDITIONS: 1. Value of Land included in Gross Amount
Charged
2. CENVAT Credit in respect of INPUTS NOT AVAILED

Case Study-7
Now the moot question arises whether a person providing
Works Contract Services is mandatorily required to
discharge its Service Tax Liability as per aforesaid Rule 2A
or can avail any other method of valuation?

Apart from adopting methods prescribed by Rule 2A, the

person providing Works Contac service provider has an option
to valued its service as per the provisions contained in
Section 67 read with Rule 5 of Service Tax
(Determination of Value) Rules, 2006

Case Study- 8
A builder engages three sub-contracts in order to execute the
construction work (including material) of a new building. The
said Sub-Contractors have been awarded the work as follows:
Civil work has been given to Mr. A
Electrification work has been given to Mr. B
Plumbing & Fire fighting work has been given to Mr. C

Whether all aforesaid contracts fall under the ambit of term

original works as defined under Rule 2A of Service Tax
(Determination of Value) Rules, 2006?

The scope of term Construction can not be restricted to

merely putting up walls, roof and floor etc. In different words,
completion and finishing services [such as glazing, plastering,
floor and wall tiling, installation of electrical fittings, plumbing
works etc.] also fall within the ambit of term Construction
which itself gets covered under the definition of term Original
Works.
Therefore, all above contracts are eligible to discharge service
tax liability on the 40% of the total amount charged for the
works contract.

Case Study- 9
What are the options available
discharging its Service Tax Liability?

to

Builder

for

In addition to discharging Service Tax liability after availing

abatement as per Notification No 26/2012 dated
20.06.2012, the builder can also discharge its Service Tax
Liability as per Rule 2A of Service Tax (Determination of Value),
Rules, 2006 provided it entered into a separate agreement
with the allottee for the sale of land. The same has been
explained with the help of following illustration.

A builder ABC Ltd. construct and sold the building.

Costs incurred by him for constructing the building &
other relevant details are as under:
S.No

Particulars

1.

Total Gross Amount Charged

2.
3.
4.
5.

Cost of Land
Value of Material used
Cost of Labour Services
CENVAT Credit on Input

6.

CENVAT Credit on Inputs services

7.

CENVAT Credit on Capital Goods (Total

CENVAT is RS. 400. 50% of the has been
availed)

Amount(Rs
.)
1,00,000
60,000
22,000
4,000
1200
412
200

PARTICULARS

Valuation Methods
Option A

Option B

Option C

Option D

Separate Land Agreement is required to be

made
Relevant Notification/provision
Gross Amount Charged
Less : - Exemption of 75%

No.
26/2012
Rs. 1,00,000

Less :- Cost of Land

NIL

Less :- Value of Material

NIL

NIL
(Rs.
60,000)
(Rs.
22,000)

Rs. 25,000

Rs. 18,000

Rs. 3,090

Rs. 2,225

Taxable Value

Service Tax thereon (12.36%)

Less :- CENVAT Credit on Input

(Rs. 75,000)

Rule 2A (i)
Rs.
1,00,000

NIL

Rule 2A
(ii)
Rs.
1,00,000
NIL
(Rs.
60,000)
NIL
Rs.
40,000

Rs. 1978
(@4.944
%)

Section 67
Rs. 1,00,000
NIL
(Rs. 60,000)
NIL
Rs.40,000

Rs. 4,944

NIL

NIL

1200

Less :- CENVAT Credit on Input

Services

412

412

412

412

Less :- CENVAT Credit on Capital

Goods

200

200

200

200

Rs. 1,366

Rs. 3,132

Service Tax to be paid in cash

Rs. 2,478

Rs. 1,613

Value for Reversal under Rule 6 (3) of

CENVAT Credit Rules, 2004

Case Study10
For Instance:
Value of flats sold by M/s ABC Ltd = Rs 1,00,00,000/(Taxable Service)
Service Tax discharged = As per Rule 2A(ii) of Service Tax
(determination of Value) Rules, 2006, i.e. on 40% of aforesaid
value.
Gross Amount Charged for construction of Road = Rs
1,00,00,000
(Exempted Service Entry No 13 of Notification No
25/2012 dated 20.06.2012).
Further, ABC Ltd has availed CENVAT Credit of Rs 40,00,000 in
respect of aforesaid services.
What will be the amount which ABC Pvt Ltd is
liable to pay as per Rule 6 (3) of CENVAT Credit
Rules, 2004?

Amount required to be paid as per Rule 6 (3) (i) of CENVAT

Credit Rules, 2004 = 6% of Exempted Services
= 6% of Rs 1,00,00,000
=
Rs 6,00,000
Amount required to be paid as per Rule 6 (3) (ii) of
CENVAT Credit Rules, 2004 =
40,00,000 * 1,00,00,000
2,00,00,000
= Rs 20,00,000
To Conclude: The value should be taken for the
purpose of aforesaid Rule shall be Gross Amount
Charged not the amount on which Service Tax has
been paid.

POINT OF TAXATION FOR CERTAIN RELEVANT

TRANSACTIONS

1. Maintenance services
2.
Services provided by builders/developers to land
owners under collaboration agreements
The said services are treated as Continuous Supply of Services
as per Rule 2(c) of Point of Taxation Rules, 2011.
Proviso to Rule 3 of Point of Taxation Rules, 2011 provides for
determination of point of taxation in such type of services
3. Sale of buildings (shops/offices) of land owner by
builders
. Services provided by Land owner to buyers: Point of
taxation shall be determined as per proviso to Rule 3 of
Point of Taxation Rules, 2011.
. Services Provided by Builder to Landowner: Point of
taxation shall be determined as per Rule 3 of Point of
Taxation Rules, 2011

Thank You you

CA. Ashok Batra
Ph.: 45134430-38
Email Id : caashokbatra@gmail.com