Accounts Notes: Service tax on Construction Services

Indian Service Tax
Construction Services

Effective Date 10/09/2004.

Authority: Finance (No.2) Act, 2004

Rate of Service Tax: 10% - Cess 2% of 10% = 0.2. Total ST = 10.2%
Definition

construction service" means -

construction of new building or civil structure or a part thereof or

repair, alteration or restoration of, or similar services in relation to, building or civil structure, which is

used, or to be used, primarily for or

occupied, or to be occupied, primarily with or

engaged, or to be engaged, primarily in,

commerce or industry, or work intended for commerce or industry, but does not include road, airport, railway, transport terminal, bridge, tunnel, long distance pipeline and dam, [Section 65 (30a)].
Taxable Service

Taxable service means any service provided to any person, by a commercial concern, in relation to construction service, [Section 65 (105) (zzq)]

Value of taxable service: Gross amount
Exemptions

See Notification No. 18/2004-ST, dt. 10/9/2004 at the end of the Chapter of "Airport Services".

Govt./Residential buildings

Airports

Dams

Bridges

Tunnels

Roads

Person liable to pay Construction Service Provider

Head of Account: To be issued.
Changes from 10/9/2004

F.No. B2/8/2004-TRU, Date 10/9/2004

13. Construction services (commercial and industrial buildings or civil structures)

13.1 Services provided by a commercial concern in relation to construction, repairs, alteration or restoration of such buildings, civil structures or parts thereof which are used, occupied or engaged for the purposes of commerce and industry are covered under this new levy. In this case the service is essentially provided to a person who gets such constructions etc. done, by a building or civil contractor. Estate builders who construct buildings/ civil structures for themselves (for their own use, renting it out or for selling it subsequently) are not taxable service providers. However, if such real estate owners hire contractor/ contractors, the payment made to such contractor would be subjected to service tax under this head. The tax is limited only in case the service is provided by a commercial concern. Thus service provided by a laborer engaged directly by the property owner or a contractor who does not have a business establishment would not be subject to service tax.

13.2 The leviability of service tax would depend primarily upon whether the building or civil structure is 'used, or to be used' for commerce or industry. The information about this has to be gathered from the approved plan of the building or civil construction. Such constructions which are for the use of organizations or institutions being established solely for educational, religious, charitable, health, sanitation or philanthropic purposes and not for the purposes of profit are not taxable, being non-commercial in nature. Generally, government buildings or civil constructions are used for residential, office purposes or for providing civic amenities. Thus, normally government constructions would not be taxable. However, if such constructions are for commercial purposes like local government bodies getting shops constructed for letting them out, such activity would be commercial and builders would be subjected to service tax.

13.3 In case of multi-purpose buildings such as residential cum commercial construction, tax would be leviable in case such immovable property is treated as a commercial property under the local/ municipal laws.

13.4 The definition of service specifically excludes construction of roads, airports, railway. transport terminals, bridge, tunnel, long distance pipelines and dams. In this regard it is clarified that any pipeline other than those running within an industrial and commercial establishment such as a factory, refinery and similar industrial establishments are long distance pipelines. Thus, construction of pipeline running within such an industrial and commercial establishment is within the scope of the levy.

13.5 The gross value charged by the building contractors include the material cost, namely, the cost of cement, steel, fittings and fixtures, tiles etc.Under theCenvat Credit Rules, 2004, the service provider can take credit of excise duty paid on such inputs. However, it has been pointed out that these materials are normally procured from the market and are not covered under the duty paying documents. Further, a general exemption is available to goods sold during the course of providing service (Notification No. 12/2003-S.T.)

But the exemption is subject to the condition of availability of documentary proof specially indicating the value of the goods sold. In case of a composite contract, bifurcation of value of goods sold is often difficult. Considering these facts, an abatement of 67% has been provided in case of composite contracts where the gross amount charged includes the value of material cost. (Refer Notification No. 15/2004-S.T., dated 10/9/2004). This would, however, be optional subject to the condition that no credit of input goods, capital goods and no benefit (under Notification No. 12/2003-ST) of exemption towards cost of goods are availed.