Background: It is very common practice in the construction or infrastructure related industries that the

contract prices agreed between the parties are inclusive of taxes applicable on such
construction/maintenance/repair/renovation or related activities. In such circumstances, the
serviceprovider can not levy service tax over and above the contract price and is bound to discharge its
liability of service tax from the price charged. As we all know that the recent amendments in service tax
regime have drastically changed the system of taxation on services. Through this article, we have made
an attempt to assess the post amendment position under law with respect to taxability of inclusive rate
works contracts.
Statutory Provision:
Section 67(2) of Finance Act, 1994 provides that where the gross amount charged by a service provider,
for the service provided or to be provided is inclusive of service tax payable, the value of such taxable
service shall be such amount as, with the addition of tax payable, is equal to the gross amount charged.
It can be easily infer from above that where contract price of any works contract is inclusive of all taxes
then taxable value of such service under such contract shall be computed in a manner that the value of
service and service tax thereon shall be equivalent to the contract price. Valuation of works contract
services shall be determined in accordance with the rules framed for the said purpose i.e. Rule 2A of
Service Tax (Determination of Value) Rules, 2006. In terms of this rule, value of service portion in the
execution of a works contract can be determined by following two options:
Option 1: Actual Cost Method
Under this method, service provider shall compute the value of services by reducing the value of goods
transferred in the execution of the works contract and sales tax thereon from the gross amount of
charged. Further, service provider is eligible to utilize CENVAT Credit on eligible inputs, input services and
capital
goods
for
the
payment
of
its
liability
of
service
tax
on
its
output

services.
*Value of service shall include labour cost, fuel/electricity cost, hire charges, planning/designing cost used
in the execution of said works contract. [Refer Rule 2A(i)(b) of ST (Valuation) Rules, 2006]
Illustration:
AAA Ltd has entered into a contract with BBB Ltd for construction of an office of BBB Ltd for a
consideration of Rs.50,00,000/- (inclusive of all taxes and cost involved in it). The execution of such
contract involves transfer of property in goods worth Rs.30,00,000. ABC Ltd has adopted same value for
the purpose of payment of VAT of Rs.3,50,000 (approx). In this case, the valuation of service and service
tax thereon shall be determined in following manner:
Contract Value
Less: Value of Material transferred & VAT
Gross Amount Charged
(inclusive of service tax)

:
:

50,00,000
33,50,000

16,50,000

Taxable Value of Service

14,68,494

(16,50,000/112.36*100)
Service Tax Payable
(14,68,500*12.36%)
Option 2: Fixed percentage method

1,81,506

Under this method, the value of service portion in the execution of various types of works contractshall be
computed at a fixed percentage of the total amount charged for the provision of such service.
Service provider is not allowed to take CENVAT Credit on inputs used in or in relation to said works
contract. Valuation of various types of works contract is tabulated herein below:1

S.
No.

(A)

(B)

(C)

Purpose of the Works

Contract
Execution of Original Works

Taxable
Value
ofService
40% of Total
Amount
Charged*

Maintenance or Repair or 70% of Total

Reconditioning or Restoration Amount
or Servicing of any Goods
Charged*
Any purpose other than 60% of Total
mentioned in (A) & (B) above, Amount
including Maintenance, Repair, Charged*
Completion
and
Finishing
Services [such as Glazing,
Plastering,
Floor
andInstallation of
Electrical
Fittings] of an immovable
property.

*Total amount charged shall include the value of goods or services supplied in or in relation to anyworks
contract after deducting amount charged for such goods or services and VAT levied thereon.
Illustration:
AAA Ltd has entered into a contract with BBB Ltd for construction of an office of BBB Ltd for a
consideration of Rs.50,00,000/- (inclusive of all taxes). During the execution of the contract BBB Ltd
provides the services of interior decorator along with some material to be used in construction of such
office to AAA Ltd at a price of Rs.10,00,000 while the market value of such service and material is

Rs.20,00,000/-. Now the valuation of service and service tax thereon under such contract shall be
determined in following manner:
Contract Value
Add: Value of Material / services supplied
Less: Amount paid to service receiver

:
:

20,00,000
10,00,000

Total Amount Charged (A)

Taxable Value of Service (40% of A)

50,00,000

60,00,000
:

24,00,000

(inclusive of service tax)

Taxable Value of Service

21,35,991

(24,00,000/112.36*100)
Service Tax Payable
:
2,64,008
(21,35,991*12.36%)
This is how the service tax shall be computed under the two available options where contract price
is inclusive of service tax. Service provider may choose different option for valuation of taxable service
& computation of service tax for different contracts.
Position of Inclusive Rate Contracts under Reverse Charge:
As we all know that Reverse Charge Provisions under service tax regime have been widened w.e.f.
01st July, 2012 and is now applicable on works contract services also. In terms of these provisions, where
works contract services are being provided by a non-corporate person to a corporate entity then liability of
service tax shall be discharged by service provider and service receiver in equal proportion. Thus, in
such arrangements the service provider (i.e. Individual, Firm, HUF, AOP etc) has to deposit only 50% of
the total service tax liability and rest 50% shall be paid by service receiver (i.e. Body Corporate).
Now cases where inclusive rate contracts are being entered between a body corporate and a non-body
corporate assessee for providing works contract service then service receiver will recover the amount of
service tax payable by him under reverse charge from the payments due to serviceprovider. Therefore, in
such cases service receiver has to make a deduction of 50% of total service tax liability (like TDS
under Income Tax Act) from the payment made to service providerand the same shall be deposited to the
Government within the prescribed time limit. Every such deduction will largely affect the cash flows of the
service provider since CENVAT credit available with the service provider will be utilized against 50% of
the service tax liability only.
Undue Hardship on Small Service Provider:
It is amply clear from the provisions of Reverse Charge that such provisions will be applicable irrespective
of the size of the business of service receiver as no threshold exemption is available to them under such
provisions. Further, service receiver shall remain be liable to pay his part of service tax liability on notified
services even if service provider is availing benefit of threshold exemption of Rs.10 Lakhs and is not
charging/depositing any service tax.
Lets assume a small service provider, who is not liable to pay service tax, enters into a works
contract where prices are inclusive of all taxes and provisions of Reverse Charge also applies. Even in

such cases, the service receiver shall be liable to pay 50% of total service tax liability under reverse
charge. Since the contract price includes service tax also, service receiver will recover such amount from
the value of contract itself by way of deduction. Under such circumstances, any deduction made by
service receiver, from the amount payable to service provider, on account of service tax will adversely
affect the return of service provider.
In view of above, it is suggested to every service provider (other than body corporate) that inclusiverate
contracts should be avoided where recipient of service is a body corporate. However, in case such
contracts cannot be avoided, service provider should consider the service tax deduction to be made by
receiver while determining the cost of the work involved.
I hope this article will help people working for this industry at large. Please share your feedback at
info@ashishca.com

The revenue and the builders have always been at dispute when comes to leviability of service tax on the
consideration received in advance by thebuilders/developers from the prospective buyers of immovable
property to be constructed.
After the negative list regime the construction of a complex, building, civil structure or a part thereof,
including a complex or building intended for sale to a buyer, wholly or partly has been declared to be a
service liable to service tax. However, if the entire consideration from the prospective buyer is received
after issuance of completion certificate by competent authority then it is outside the purview of declared
service.
Statutory Provisions: The relevant statutory provision u/s 66E relating to declared services is as under:
Construction of a complex, building, civil structure or a part thereof, including a complex or building
intended for sale to a buyer, wholly or partly, except where the entire consideration is received after
issuance of completion-certificate by the competent authority.
Explanation.For the purposes of this clause,
(I) the expression competent authority means the Government or any authority authorised to issue
completion certificate under any law for the time being in force and in case of non-requirement of such
certificate from such authority, from any of the following, namely:

(A) architect registered with the Council of Architecture constituted under the Architects Act, 1972 (20 of
1972); or
(B) chartered engineer registered with the Institution of Engineers (India); or
(C) licensed surveyor of the respective local body of the city or town or village or development or
planning authority;
(II) the expression construction includes additions, alterations, replacements or remodelling of any
existing civil structure;
Manner of valuation: Since the construction activity includes two elements i.e. material and labour
element, therefore an abatement/exemption for the material part is required for arriving at the service
element. Notification No. 26/2012-ST dated 20.06.2012 provided for similar abatement/exemption.
This Notification has also been amended from time to time. Entry No. 12 of the
abovesaid Notification provides the percentage of valuation of services in such cases of construction
activities.
Earlier, such builders were allowed abatement of 75% when the value of land was part of transaction in
respect of construction of building intended for sale to prospective buyers with a condition that CENVAT
credit benefit is allowed only in respect of input services and capital goods.
The notification No. 26/2012 has been amended from time to time. W.E.F. 01-03-2013 NotificationNo.
26/2012 was amended to provide for the reduced rate of abatement for high ended homes and flats from
75% to 70% on the ground that in such cases component of service is greater.
Therefore, w.e.f 01-03-2013, exemption of 75% was made applicable only in respect of the residential unit
having carpet area upto 2000 square feet or where the amount charged in respect of such unit is less
than rupees one crore. Thus if either of the conditions was satisfied, abatement of 75% was available.
However, Again w.e.f 08-05-2013, the Government has amended entry No. 12 Notification No. 26/2012ST, whereby the percentage of exemption has been retained as it was made applicable w.e.f. 01-03-2013,
but now the exemption related to residential unit is made applicable by applying both condition in respect
of carpet area and the value of residential unit together.
Thus, now the current position is that to claim exemption at the rate of 75% both the conditions should be
satisfied i.e. carpet area of residential unit should be less than 2000 square feet and the amount charged
for such unit should also be less than Rs. 1 crore.
It should be noted that the Conditions of CENVAT credit remains unchanged till date.

The manner of valuation at different times is given as below:

From 01.07.2012 to 28.02.2013

Description
Abateme
of
taxable nt
service
(%)

Taxabl CENVAT availability

e
value Capit Inp Input
al
ut
servic
(%)
Good
e
s

Construction
75
of
a
complex,buildi
ng,
civil structure
or
a
part
thereof,
intended for a
sale
to
a
buyer, wholly
or
partly
except where
entire
consideration
is
received
after issuance
of completion
certificate by
the competent
authority

25

Yes

No

Yes

From 01.03.2013 to 07.05.2013

Description
Abateme
of
taxable nt
service
(%)

Construction
of
a

Taxabl CENVAT availability

e
value Capit Inp Input
al
ut
servic
(%)
Good
e
s
Yes

No

Yes

complex,buildi
ng,
civil structure
or
a
part
thereof,
intended for a
sale
to
a
buyer, wholly
or
partly
except where
entire
consideration
is
received
after issuance
of completion
certificate by
the competent
authority-

75
(i)
for
residential unit
having carpet
area
upto
2000 square
feetor where
the
amount
charged
is
less
than 70
rupees
one
crore;

25

30

(ii) For other

than the (i)
above.
From 08.05.2013 onwards:

Description

Abateme

Taxabl CENVAT availability

of
taxable nt
service
(%)

e
value
(%)

Construction
of
a
complex,buildi
ng,
civil structure
or
a
part
thereof,
intended for a
sale
to
a
buyer, wholly
or
partly
except where
entire
consideration
is
received
after issuance
of completion
certificate by
the competent
authority(i)
for
residential unit 75
having carpet
area is less
than
2000square
feet and where
the
amount
charged
is
less
than
rupees
one 70
crore;

25

30

Capit
al
Good
s

Inp
ut

Input
servic
e

Yes

No

Yes

(ii) For other

than the (i)
above.
It is important to note here that Explanation C has been inserted in the Notification No. 20/2012-ST
wherein it has been provided that The amount charged for the service shall include the fair market
value of all goods and services supplied by the recipient(s) in or in relation to the service, whether or not
supplied under the same contract or any other contract, after deducting(i) the amount charged for such goods or services supplied to the service provider, if any; and
(ii) the value added tax or sales tax, if any, levied thereon:
Provided that the fair market value of goods and services so supplied may be determined in accordance
with the generally accepted accounting principles.
The implications of the above explanation are that if any goods are supplied by the contractee to the
builder-contractor free of cost or at lesser price than the fair market value of such goods, then for the
purpose of calculating taxable value, gross amount charged shall include fair market value of such goods
supplied after deducting the price charged for such goods and VAT, saes tax if any levied thereon.
Why Construction of residential apartments/complexes is declared as service separately from
the works contract service: It is notable here that construction of a complex, building,
civilstructure when consideration is received in advance from prospective buyers has been declared as a
service separately from the works contract service. The valuation rules in both the above declared
services are separate.
The question at this junction which comes to mind is why services provided by builder are not works
contract services, why they have been declared as services separately from the works contract services.
In K. Raheja Development Corporation vs State of Karnataka AIR 2005 SC 2350 Supreme Court held
that construction of residential apartments or complexes would be a works contract if agreement is
entered into with the prospective buyers for the sale of such apartments and complexes and payment
towards it is received in advance fully or partly, before the completion of the same.
Although the Judgement of the Supreme Court in K Raheja case was doubted in the subsequent case of
Larsen & Toubro Limited v State of Karnataka 2008 (12) STR 257 (SC) and the matter was referred to the
larger bench of the Supreme Court, but until the final verdict of the larger bench of the SC, decision in K.
Raheja case still holds the ground.
The service element in the services provided by the builders exists obviously because of the reason that it
is a works contract, as two elements are involved in the construction activity i.e material element and
service element.
Therefore it is difficult to understand why a separate entry was required to be declared as service u/s 66E
for levy of service tax on builders apart from the works contract service and why separate valuation rules
are required when both the services are of same nature.

However, in para 2.6.2 of Education Guide it is stated by giving an example that a builder carrying out an
activity for a client wherein a flat is constructed by the builder for the client for which payments are
received in installments and on completion of the construction title in the flat is transferred to the client,
involves two elements namely provision of construction service and transfer of title in immovable property.
The two activities are discernibly separate.
The above example hints at the intention of the legislature that the Central Government does not treat
construction of building intended for sale to prospective buyers as a works contract but a separately
declared service, in such case the question would be why State Governments should consider such
activity as works contract and claim VAT on the material portion of such activity.