Pranav B Prem

The Rajasthan Authority for Advance Ruling (AAR) has held that labour services provided at construction work sites fall under HSN code 9954 and attract Goods and Services Tax (GST) at the rate of 18%. The Bench comprising Utkarsha (Joint Commissioner, Central Tax) and Dr. Akhedan Charan (Additional Commissioner, State Tax) delivered the ruling on an application filed by M/s Build Layer Constructions, a registered entity engaged in providing labour services for construction projects.

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Background of the Case

M/s Build Layer Constructions entered into an agreement with M/s BCM Builders LLP, which had been awarded a contract by the Government of Rajasthan for the construction of 380 flats under the “Affordable Housing Scheme” as part of the Pradhan Mantri Awas Yojana (PMAY).

Under the agreement, BCM Builders LLP was responsible for both material and labour components of the project. However, it sub-contracted the labour-related work to the applicant. The applicant’s scope of work included control over the labour workforce, responsibility for payment of their dues, and execution of labour-intensive construction services. It was expressly recorded in the contract that all material was to be supplied by BCM Builders LLP, while the applicant would only provide labour.

The applicant argued that the services provided were purely labour contracts and therefore fell within the scope of Entry No. 10 of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017, which exempts such services when provided for beneficiary-led individual house construction under the Housing for All (Urban) Mission or PMAY.

Applicant’s Submissions

The applicant submitted that the exemption notification was activity-based and should also apply to sub-contractors providing labour services. It was argued that the nature of the contract between BCM Builders LLP and the Rajasthan Government remained unchanged when subcontracted, and therefore the same exemption available to the main contractor should flow to the sub-contractor. It was further contended that the applicant fulfilled the twin conditions of Entry No. 10:

1. The services provided were by way of pure labour contracts.

2. The services pertained to construction of residential units under PMAY.

The applicant also relied on earlier advance rulings where similar labour contracts under PMAY had been held exempt.

Comments of the Jurisdictional Officer

The jurisdictional tax officer observed that contractors and sub-contractors are not separately defined in the CGST Act. However, in commercial parlance, a subcontractor’s services form part of the same overall project, and the nature of the contract does not change merely because part of the work is awarded to another entity. It was noted that prima facie, the exemption under Notification No. 12/2017 should also extend to subcontractors in such cases. Reliance was placed on an earlier ruling of the Rajasthan AAR in 2019, where labour services for construction of flats under PMAY were held exempt.

Findings of the AAR

The AAR carefully examined the application, the agreement between the applicant and BCM Builders LLP, and the submissions made at the time of hearing. The Authority noted that Entry No. 10 of Notification No. 12/2017 provides exemption to pure labour contracts relating to beneficiary-led individual house construction under PMAY. However, two major deficiencies were highlighted in the applicant’s case:

1. Contractual obligations beyond pure labour – On examining clauses of the agreement, the AAR observed that the applicant was obliged not only to provide labour but also to arrange certain machines and material. This meant the contract could not be classified as a “pure labour contract” in its entirety.

2. Failure to establish PMAY nexus – During the personal hearing, the applicant undertook to provide proof that BCM Builders LLP was executing the project under PMAY. However, no such proof or agreement was submitted thereafter. In absence of this evidence, the Authority held that the applicant’s services could not be conclusively linked to PMAY.

On these grounds, the AAR ruled that the benefit of exemption under Entry No. 10 could not be granted.

Classification Under Notification No. 11/2017

Since the exemption was found inapplicable, the AAR turned to Notification No. 11/2017-Central Tax (Rate), which prescribes rates for construction services. On analysis, the Authority held that the services provided by the applicant did not fall under the specific categories in items (i) to (xi) of Heading 9954, and therefore were classifiable under the residuary entry (xii) of construction services. Accordingly, the services fell under HSN Code 9954 (xii), attracting GST at the rate of 18%.

Ruling

• The services provided by M/s Build Layer Constructions do not qualify for exemption under Entry No. 10 of Notification No. 12/2017-Central Tax (Rate).

• The services are classifiable under HSN Code 9954 (xii) as construction services, attracting 18% GST.

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Thus, the application was answered against the applicant.

Applicant’s Name: M/S Build Layer Constructions