There's good news for contractors undertaking construction for the Defence forces. Such construction, if located within cantonment premises, will not attract service tax. The revenue department is expected to issue a clarification soon on the issue.

Sources said a fresh clarification is being issued since the representation sent by the Armed Forces regarding applicability of service tax did not specifically mention where such construction would take place.

"The army (which had made the representation) has informed the revenue department that 90 per cent of the construction is within cantonment premises. The law clearly states that the tax will not be applicable on layout of premises for which no permission is required from an authority. Since the cantonment area is owned by the Defence forces, it does not require any authority's permission to undertake such construction. Hence, all such construction will not be liable to tax," the sources said.

However, construction undertaken by contractors for personal use of Defence personnel like those undertaken on behalf of the Army Welfare Housing Society will continue to attract the provision of the tax.

The Army had earlier this year sought to know whether contractors who construct residential complexes under "married accommodation project for Indian Army personnel should be charged to service tax".

It had also sought to know whether the tax could be levied on residential complexes which are for personal use of service personnel.

The CBEC had in June examined the issue and concluded that in the absence of any exemption to government organisations, service tax at applicable rates would be chargeable on such construction.

It was of the view that exclusion from service tax provided under the definition of residential complex in the Finance Act 1994 for complexes constructed by a person directly engaging any other person and where the construction of such a complex is intended for personal use was not applicable in this case.

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