03 December 2013
Query: What is the taxable event in the following cases for Builder
1. Advances received, however construction not started ( means no services have been provided) nor agreement for sale entered
2. This is more practical where Builders enters agreement under 20:80 scheme, where 20% Advance is received and Agreement is executed and balance 80% amount is due and receivable at possession.
In this case whether Service tax would be payable to the extent of a) Only on 20% of Advance ( being recd) at the time of receipt and bal. 80% on possession b) 100% of agreement value ( Since agreement entered) - though services are not provided in full
Kindly request your response, as this is practical case of my client.
26 July 2025
Great question! The taxability of service tax in the case of builders receiving advances is a practical and important issue.
Here’s the breakdown of the **taxable event and service tax implications** under the pre-GST service tax regime (relevant as of 2013):
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### 1. Advances received, but construction not started, and no agreement for sale entered:
* **Service tax is generally leviable on the value of taxable services when the service is provided or when consideration is received, whichever is earlier.** * However, **if no service has been provided** (i.e., no construction started) and **no agreement for sale has been executed**, the advance received is usually considered as **advance receipt and not liable to service tax immediately** because no taxable service has commenced or been agreed upon. * The **taxable event** (provision of service) has not occurred yet. * Service tax liability arises only once the service starts or the agreement is executed and consideration is due/received.
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### 2. Builder enters agreement under 20:80 scheme (20% advance + agreement executed + balance 80% on possession):
* **Agreement entered means a contract for taxable service has been executed.**
* As per service tax rules and judicial pronouncements (including CESTAT), service tax liability arises when the service is provided or the consideration is received, whichever is earlier.
* In this case:
**a) On 20% advance receipt:**
* Service tax is payable on the **amount actually received**, i.e., the 20% advance.
**b) On balance 80% payable at possession:**
* Service tax is payable on the balance 80% **when possession is handed over** (service provided), and the amount becomes due/receivable.
* **Service tax is NOT payable on the entire agreement value upfront**, unless the entire consideration is received upfront or the service is provided fully.
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### Summary:
| Situation | Taxable Event | Service Tax Liability | | ------------------------------------------------------ | ----------------------------------------------------------------------------- | ------------------------------------------------------------ | | Advances received, no agreement, no construction | No service provided, no taxable event | No service tax at advance receipt | | Agreement executed with 20% advance, 80% on possession | Agreement executed and advance received (part service provided on possession) | Service tax on 20% advance on receipt, and 80% on possession |
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### Key references:
* Service Tax Law and Board Circulars * CESTAT rulings on real estate advances * Section 67 of Finance Act, 1994 (Valuation rules)
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**In practical terms:** Builders should pay service tax only on the advance amount received and on the balance amount as and when possession is given. They are not required to pay service tax on the entire agreement value at the time of signing the agreement if full consideration has not been received or service provided.
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If you want, I can help you with the exact case law or circular references that support this or assist with drafting an advisory note for your client. Would you like that?
CAclubindia
