Service tax in case of construction company
This query is : Resolved
09 January 2014
Dear Sir,
I have been assigned an audit of a Pvt Ltd company which is engaged in the business of construction and sale of residential flats. They pay service tax at 4.944% since construction companies have an abatement of 40%. The practice of the management is such that they pay tax only from the date of registration of UDS and not for the advances that has been received prior to registration. And once they get it registered, they pay service tax as under:
Total amount receivable xxx
(-) Land cost xxx
(-) UDS registration cost xxx
(-) Corpus Fund xxx
(-) VAT xxx
Net amount XXX * 12.36% * 40%
The reason given by the management is that they do not want to unnecessarily waste their money by paying service tax in case a person who has paid the advance money could not get it registered due to paucity of funds from his side, in which case he may get back the money that he had paid as advance for the flat. Whether this is correct or wrong pl let me know as soon as possible.
I have been assigned an audit of a Pvt Ltd company which is engaged in the business of construction and sale of residential flats. They pay service tax at 4.944% since construction companies have an abatement of 40%. The practice of the management is such that they pay tax only from the date of registration of UDS and not for the advances that has been received prior to registration. And once they get it registered, they pay service tax as under:
Total amount receivable xxx
(-) Land cost xxx
(-) UDS registration cost xxx
(-) Corpus Fund xxx
(-) VAT xxx
Net amount XXX * 12.36% * 40%
The reason given by the management is that they do not want to unnecessarily waste their money by paying service tax in case a person who has paid the advance money could not get it registered due to paucity of funds from his side, in which case he may get back the money that he had paid as advance for the flat. Whether this is correct or wrong pl let me know as soon as possible.
10 January 2014
the above working is not correct as land is sold by builder (he incurred cost) not registration cost(if borne by purchaser). the net amount is taxed at 12.36% and not 40% of 12.36%. In works contract you may not deduct land value. Works contract is not applicable in this case. Service tax is payable even on advance received. The developer should insist on registration as soon as booking is done to avoid cancellation.
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10 January 2014
Both VAT and ST are applicable from the date of booking a flat and start paying advances.For both again land cost,registration cost and corpus fund are to be deducted before calculating tax.If under composition VAT @4% and ST@ 4.94% on the works cost. Under normal scheme full rates on 70% of works cost(after deducting the above amounts and labour @ 30% and for VAT and material @ 60% for ST) are to be charged.....mjk
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13 January 2014
Mr.M J krishnamurthy, thanks for your advice sir. But in which context did you mean the word "Booking"? because my client pays service tax only from the date of getting their house registered and so do you mention here about the date of registration or the pre-booking advance that has been paid by them? Pl advice.
24 July 2025
Great question! Let me clarify the **service tax treatment for construction companies, especially regarding advances and the point of taxation** in the context of residential flats:
---
### Key points on Service Tax for Construction Company (Residential Flats)
1. **Service tax is payable on advances received for construction services from the date the advance is received**, not from the date of registration of the flat or the UDS (Undivided Share of land).
* The moment you receive advance payments from a customer for construction, it creates a **taxable event**.
* The tax authority considers **booking/advance receipt date** as the point of taxation, even if registration of flat or UDS happens later.
2. **You cannot delay paying service tax till flat registration date.**
* The reason: Even if the flat registration eventually fails (e.g., buyer backs out), the advance received was for a service rendered (construction), and service tax is chargeable on it.
* If refund is made later, the developer can adjust the service tax accordingly (by credit or refund claims), but initial tax liability arises on receipt of advance.
3. **Regarding deduction of land cost, registration cost, corpus fund, VAT:**
* **Land cost** can be deducted while calculating the taxable value of construction service, since sale of land is exempt from service tax.
* **UDS Registration cost** — this is typically borne by the buyer and not part of construction service value, so can be excluded.
* **Corpus fund** and **VAT** are also excluded from the service tax base.
* The taxable value should be calculated on **construction cost excluding land, registration, corpus fund, and VAT**.
4. **Abatement of 40% and rate of service tax:**
* Builders get an abatement of 40% on the taxable value (construction services).
* Effective service tax rate after abatement is **12.36% on 60% of value** (i.e., 4.944% on gross amount).
* So, your client’s approach to calculate service tax as `Net amount * 12.36% * 40%` is **incorrect**.
* The correct formula is:
$$
\text{Taxable value} = \text{Gross amount} - \text{Land cost} - \text{UDS registration cost} - \text{Corpus fund} - \text{VAT}
$$
$$
\text{Service Tax} = \text{Taxable value} \times 12.36\% \times 60\%
$$
5. **Point of taxation rules:**
* Advances received towards construction are taxable as per point of taxation rules.
* If advances are received before registration, service tax is still payable on those advances.
* Registration date affects ownership but not service tax liability.
---
### Summary for your audit
| Issue | Correct Approach |
| ---------------------------------- | ---------------------------------------------------- |
| Tax on advance payments | Service tax payable on advance from date of receipt |
| Deductible amounts | Deduct land cost, UDS registration, corpus fund, VAT |
| Calculation of service tax | Taxable value × 12.36% × 60% (due to 40% abatement) |
| Delay of payment till registration | Incorrect; tax must be paid on advance received |
---
If your client delays service tax payment until flat registration, they are **not compliant with service tax laws** and are exposed to interest and penalties on delayed tax payments.
---
Would you like me to help you draft audit observations or provide a sample calculation for better clarity?
---
### Key points on Service Tax for Construction Company (Residential Flats)
1. **Service tax is payable on advances received for construction services from the date the advance is received**, not from the date of registration of the flat or the UDS (Undivided Share of land).
* The moment you receive advance payments from a customer for construction, it creates a **taxable event**.
* The tax authority considers **booking/advance receipt date** as the point of taxation, even if registration of flat or UDS happens later.
2. **You cannot delay paying service tax till flat registration date.**
* The reason: Even if the flat registration eventually fails (e.g., buyer backs out), the advance received was for a service rendered (construction), and service tax is chargeable on it.
* If refund is made later, the developer can adjust the service tax accordingly (by credit or refund claims), but initial tax liability arises on receipt of advance.
3. **Regarding deduction of land cost, registration cost, corpus fund, VAT:**
* **Land cost** can be deducted while calculating the taxable value of construction service, since sale of land is exempt from service tax.
* **UDS Registration cost** — this is typically borne by the buyer and not part of construction service value, so can be excluded.
* **Corpus fund** and **VAT** are also excluded from the service tax base.
* The taxable value should be calculated on **construction cost excluding land, registration, corpus fund, and VAT**.
4. **Abatement of 40% and rate of service tax:**
* Builders get an abatement of 40% on the taxable value (construction services).
* Effective service tax rate after abatement is **12.36% on 60% of value** (i.e., 4.944% on gross amount).
* So, your client’s approach to calculate service tax as `Net amount * 12.36% * 40%` is **incorrect**.
* The correct formula is:
$$
\text{Taxable value} = \text{Gross amount} - \text{Land cost} - \text{UDS registration cost} - \text{Corpus fund} - \text{VAT}
$$
$$
\text{Service Tax} = \text{Taxable value} \times 12.36\% \times 60\%
$$
5. **Point of taxation rules:**
* Advances received towards construction are taxable as per point of taxation rules.
* If advances are received before registration, service tax is still payable on those advances.
* Registration date affects ownership but not service tax liability.
---
### Summary for your audit
| Issue | Correct Approach |
| ---------------------------------- | ---------------------------------------------------- |
| Tax on advance payments | Service tax payable on advance from date of receipt |
| Deductible amounts | Deduct land cost, UDS registration, corpus fund, VAT |
| Calculation of service tax | Taxable value × 12.36% × 60% (due to 40% abatement) |
| Delay of payment till registration | Incorrect; tax must be paid on advance received |
---
If your client delays service tax payment until flat registration, they are **not compliant with service tax laws** and are exposed to interest and penalties on delayed tax payments.
---
Would you like me to help you draft audit observations or provide a sample calculation for better clarity?
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