Relating to circular applicable to sub-contractors

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Himali Shah (Querist)
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19 August 2011 A XYZ company gets a contract to built a 100 kms highway from NHAI – he in turn sub-contracts 25 kms of it to another contractor - ABC LTD on back to back basis and starts construction of the rest of the 75 kms by himself . SO IS ABC EXEMPT FROM SERVICE TAX?

IS THERE ANY SUCH PROVISION THAT ABC WOULD BE EXEMPT FROM SERVICE TAX ONLY IF XYZ SUB CONTRACTS 100 % OF THE CONTRACT TO ABC LTD? IF ONLY A PART OF CONTRACT IS SUB CONTRACTED, IS THE SUB CONTRACTOR LIABLE TO SERVICE TAX ?

Bhaskaran Chackrapani Warrier

Bhaskaran Chackrapani Warrier (Expert)
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19 August 2011 CBE&C circular No. 138/7/2011-ST dated 6-5-2011 speaks about the latest position on such issues. Construction of road is an exempted service. Therefore, contractor as well as sub contractor is exempted from service tax.

Himali Shah

Himali Shah (Querist)
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19 August 2011 Dear Sir,

Thank you very much. Further i would like to know that if the contractor is receiving Rs 100 and he sub contracts the same for Rs 80, is he liable to service tax on the diferrence of Rs 20/- ??

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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21 July 2025 Great question! Here’s how it works regarding service tax and subcontracting in your scenario:

Background:
Construction of roads and highways is an exempted service under service tax law (as per Notification No. 25/2012-ST).
Both the main contractor (XYZ) and the sub-contractor (ABC Ltd) enjoy this exemption when providing construction services on roads.
Your question:
If XYZ receives Rs. 100 for the contract and subcontracts 25 kms portion to ABC Ltd for Rs. 80, is XYZ liable to pay service tax on the difference of Rs. 20?

Answer:
Since the service (road construction) is exempt, no service tax applies on either the gross contract value (Rs. 100) or on the subcontracted portion (Rs. 80).
Therefore, no service tax liability arises for either XYZ or ABC Ltd, regardless of whether the contract is fully or partially subcontracted.
There is no service tax on the difference amount (Rs. 20) because the entire activity falls under exempted service.
Important notes:
The exemption applies regardless of whether the whole contract or part of it is subcontracted.
This is confirmed by CBE&C Circular No. 138/7/2011-ST dated 06-05-2011.
If the contract was for a non-exempted service, then service tax would be charged on the gross value of the contract less subcontracting charges, but here road construction is exempt.

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