The canal system built by the Government or under Government projects, will not be chargeable to service tax. However, if the canal system is built by private agencies and is developed as a revenue generating measure, then such construction would be charged to service tax.
Government takes up construction activity of dams, irrigation projects buildings or infrastructure construction etc. Section 65 (105) (zzzza) of Finance Act, 1994excludes works contract in respect of dams, tunnels, canals of irrigation projects, road, airports, railways, transport terminals & bridges executed through such turn-key or EPC mode. Hence works contract in respect of above works even if done through turn-key or EPC mode are exempt from payment of service tax

For more details read Circular No. 116/10/2009 - ST http://www.servicetax.gov.in/st-cirmainpg.htm