Whether liable to service tax or not?

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

20 January 2014 Local Authority has floated tender for Const. of affordable houses for Economically Weaker, Low Income Group section. Local Authority has given work order for Const. of Houses & other infrastructure works. Land owner is Local Authority, Contractor has to construct building only & hand over to Local Authority. Local Authority will distribute the houses to the beneficiaries.

In this case whether Service Tax is applicable or not, the point of taxation whether Local Authority should collect tax at the time of sale?

Contract has submitted the tender alongwith service tax cost, as per our understanding work awarded by local authority is exempt from service tax. Whether contractor's claim for service tax is tenable or not?

@VaibhavJ

@VaibhavJ (Expert)
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20 January 2014 Hi,

Yes, pl refer CBEC clarification

http://taxguru.in/service-tax/service-tax-construction-services-cbec-clarification.html

Thx

Querist : Anonymous

Querist : Anonymous (Querist)

24 January 2014 Still in confusion! Waiting for another reply!

Asha Kanta Sharma

Asha Kanta Sharma (Expert)
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03 August 2025 This is a classic case involving **construction services for a government (local authority)** project under the **Service Tax regime** in **Financial Year 2013–14**, and your question revolves around **exemption eligibility** and whether **Service Tax is applicable** on construction of houses for EWS/LIG by a contractor for a **Local Authority**.

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## ✅ Summary of Facts:

* **Work**: Construction of affordable housing + infrastructure for EWS/LIG
* **Client**: Local Authority (government body)
* **Ownership**: Land belongs to Local Authority
* **Beneficiaries**: Houses distributed by Local Authority to eligible individuals
* **Contractor**: Submits tender including service tax
* **Query**: Whether Service Tax is payable or exempt?

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## 🔍 Legal Background (as on 20 Jan 2014):

After 1 July 2012, Service Tax operated under the **Negative List regime** (Section 66D of the Finance Act, 1994). However, many **exemptions** were granted via **Notification No. 25/2012-ST dated 20.06.2012**, which was updated from time to time.

### ✳️ Relevant Exemption:

**Sl. No. 12(c) of Notification No. 25/2012-ST** (as amended):

> Services provided to the Government, a Local Authority or a Governmental Authority by way of:
>
> **(c)** construction of a civil structure or any other original works **meant predominantly for use other than for commerce, industry, or any other business or profession**.

Also relevant:

**Sl. No. 13(a):**

> Services provided by way of construction, erection, commissioning, or installation of original works pertaining to:
>
> (a) **low-cost houses up to a carpet area of 60 sq.m per house** in a **housing project approved by competent authority** under:
>
> * Jawaharlal Nehru National Urban Renewal Mission (JNNURM)
> * Rajiv Awas Yojana (RAY)

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## ✅ Analysis:

### ❓ Is Service Tax Applicable on This Project?

* ✔️ The service is provided **to a Local Authority**
* ✔️ It involves **construction of houses for Economically Weaker Sections / LIG**
* ✔️ The houses are **not sold by the contractor** but **handed over to the Local Authority**
* ✔️ The use is **non-commercial / non-industrial**
* ✔️ The local authority distributes the houses under a welfare scheme

👉 Therefore, this appears to be **exempt under Sl. No. 12(c)** (services to Local Authority for non-commercial public use)
**OR** under Sl. No. 13(a) if the housing project is under JNNURM/RAY or similar approved schemes.

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## ✅ Conclusion:

| Question | Answer |
| ----------------------------------------------------- | --------------------------------------------------- |
| Is Service Tax applicable on contractor in this case? | ❌ No (exempt) |
| Should Local Authority collect tax at time of sale? | ❌ No (they are not liable for ST on sale of houses) |
| Is contractor's claim for service tax valid/tenable? | ❌ Not tenable if exemption conditions are satisfied |

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## 🔔 Recommendation:

* You should **review the housing project approval documents**. If it falls under an eligible government housing scheme, then:

* The contractor should not charge service tax.
* Even if they have quoted service tax in the bid, **the actual billing should remove it** (exempt supply).

* If the contractor still charges Service Tax and deposits it to the government, refund may be difficult unless rectified timely.

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Let me know if you’d like help drafting a letter to the contractor or Local Authority referencing the correct exemption.

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