In a move that could influence the toll structure in India, the law ministry has endorsed the revenue departments view that repair and maintenance (R&M) of roads are a taxable service. The revenue department had earlier written to the National Highways Authority of India (NHAI) and many leading contractors asking them to pay tax on the services they render in the form of repair and maintenance of roads.

As per the service tax rules, repair and maintenance of any immovable property is a taxable service. The tax is leviable at the service providers end. Laying down roads is, however, outside the service tax ambit, as taxable construction services are limited to commercial/industrial complexes and residential complexes with more than 12 dwelling units. In practice, the entire road building activity, including R&Ms, have remained outside the tax net.

Speaking to ET, NHAI director-finance Satyanarayana Dash said, We had referred the revenue departments directive to us to the law department and it has clarified that repair and maintenance of any immovable property including roads will attract service tax The official, however, added that a final view was yet to be taken by the NHAI in this regard, as there are still some doubts.

According to sources, the revenue department has not taken a final view on whether the tax will be levied with retrospective effect. Sources, however, said that the new impost would indeed jack up the cost of the $12.3bn expressway project called North-South-East-West Corridor. NHAI has already awarded 5,500 km for construction of the corridor and the balance 1,800 km is set to awarded to contractors by the end of the fiscal.

NHAI undertakes R&M till the contractor to which the construction is awarded achieves financial closure. Till the award of contracts, the authority may also assign the construction work to the state public works departments. This means that the service tax liability with regard to providing R&M services will be spread between the NHAI and contractors.

NHAI cannot escape the tax, after the recent clarification by the central board of excise and customs that non-commercial concerns too are liable to pay tax on the taxable services they provide. It is, however, unclear as to whether the state PWDs will also have to pay tax, sources said.

The revenue department had earlier asked the central public works department to let it know whenever a contract for repair and maintenance contracts of roads is awarded.