Tax issues on building contractors

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dinesh (Querist)
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21 June 2011 Expers,

Pls tell vat, service tax and other allied issues applies to a building contractor and contractee who makes/sell residential or commercial property.

Bhaskaran Chackrapani Warrier

Bhaskaran Chackrapani Warrier (Expert)
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21 June 2011 If the capacity of the person constructing the building as per the written contract is 'a contractor', then works contract tax attracts as per the state VAT law and service tax attracts under section 65(105)(zzzza)under 'works contract service'.

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dinesh

dinesh (Querist)
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22 June 2011 also tell the same vat and service tax issue for the contractee who sells these property after construction by a contractor.

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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26 July 2025 Here’s a clear summary of the **tax issues for building contractors and contractees** related to construction and sale of residential or commercial properties in India:

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### 1. **For the Building Contractor:**

* **VAT / Works Contract Tax:**

* The contractor providing construction services is liable to pay **Works Contract Tax (WCT)** or **VAT** on works contract, as per the respective **State VAT laws**.
* This tax is levied on the value of the contract work (including materials and labor).
* Some states have replaced WCT with VAT on works contract; the exact applicability depends on the state.

* **Service Tax:**

* Service Tax applies under the category of **“Works Contract Service”** (Section 65(105)(zzzza) of the Finance Act).
* Contractors must charge service tax on the value of construction services (excluding cost of materials transferred in the course of execution).
* Input credit of service tax paid on inputs and input services used in construction can be availed subject to eligibility.

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### 2. **For the Contractee (the person who owns the property and sells it):**

* **VAT on Sale of Property:**

* When the contractee sells the constructed residential or commercial property, **VAT is generally not applicable on sale of immovable property** because sale of land and buildings is outside VAT (these are outside the scope of VAT as per most state VAT laws).
* However, **if the sale is of under-construction property**, VAT or works contract tax may apply depending on the state and stage of completion.

* **Service Tax on Sale:**

* The **contractee selling the property is generally not liable for service tax** on sale of completed immovable property because sale of immovable property is outside the service tax net.
* However, if the contractee is also a developer providing construction services, they may be liable to pay service tax under “Construction of Complex” service (if applicable).

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### Additional Points:

* If the contractor supplies materials along with construction, valuation and tax treatment can vary — service tax is charged only on service portion, VAT/WCT may be charged on the full contract value.
* Real estate developers (contractees who construct and sell properties) are also subject to **Service Tax on Real Estate services**, as applicable under the Finance Act (subject to certain conditions and exemptions).

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### Summary Table

| Party | Tax Type | Applicability |
| ---------- | ----------- | -------------------------------------------------- |
| Contractor | VAT / WCT | On value of works contract, as per state law |
| Contractor | Service Tax | On works contract services (excluding materials) |
| Contractee | VAT | Generally no VAT on sale of immovable property |
| Contractee | Service Tax | Generally not on sale; may apply if also developer |

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