Most of the RSWAs had started to comply with the GST law. Some were paying on the entire collections once it exceeded Rs. 7,500/- member wise or association wise. Some were paying on the excess beyond Rs.7,500/- which was the view of knowledgeable professionals. Some were paying on the sinking fund, Capital replacements fund and some were not.
Generally, the RSWA have no accountant, multiple views, people who can afford, people who cannot- taking a decision with all on boarded is a big challenge. In this present state of affairs it would have been ideal not to take a view which is diametrically against the Stated law.
The recent Circular 109 of July 2019 has again set the cat among the pigeons. 10,000s of RSWA who are under GST (complying to their best possible extent) would now have to run to the consultants [who maybe knowing the GST law or not] with old and new doubts galore. The changes set out in the circular are as under:
1. The Rs. 7,500/- exemption is to be applied as if even if Re.1 more then- GST would be applicable on the gross. Example total maintenance per month Rs.7500/- GST payable Nil - no ITC for them. If 7501/- then GST payable of Rs.1350.18 less ITC ( maybe around 1000/- on estimated basis) by that member. Net amount payable Rs. 350.18. Members below will not pay, member above will pay.
2. The residents who have multiple apartments can claim Rs.7,500 for each apartment. Earlier it was understood that if one had multiple apartments then only Rs.7,500 would be deductible and on balance payable.
Let us look at the possible old and new doubts that can arise as under:
a. Whether RSWA are liable at all in the light of the fact that there is no service from different persons? Whether the principles of mutuality would enable such member bodies to be outside of GST?
Several High Court decisions in service tax regime had confirmed this aspect.
Paper writers View: Since the definition of business in GST is very wide, unless the High Court opine that mutuality is applicable- one would not like to take this view.
b. Whether the deduction for all 3rd party expenses can be claimed and GST paid only on the balance? - SC- Inter continental decision.
Paper writers View: Maybe possible but technical issues can arise. However it is expected that it would be allowed if proper documentation and accounting is followed.
c. Whether the phrase 'upto' can mean tax on gross beyond Rs. 7,500/-
Paper writers View: No. Plain words should be read as they are as per settled law.
d. Whether earlier Circular issued clarifying that only tax need be paid after Rs.7,500/- [ …] is now invalid?
Paper writers View: The earlier Circular was in line with the law and it was proper on this aspect. It would still be considered valid due to that reason.
e. Whether the Circular issued by the tax administrators can be said to be above the Act & notifications issued by parliament?
Paper writers View: SC has several times stated that circulars not in line with law are non est in law. Tata Melting wires.
f. If applicable can this circular be retrospectively applied? If so from when?
Paper writers View: It is not a valid law and cannot even be relied on prospectively.
g. Whether electricity and water commonly used - which are exempt should be kept outside the purview of GST?
Paper writers View: It could be done if the allocation were to be done following cost accounting standards.
h. The security deposits collected for future capital goods or major repairs is liable to GST?
Paper writers View: May not be liable unless it is just advance maintenance.
i. Whether the salaries paid to a few staff of RSWA like manager, plumber, electrician though normally not a supply would be liable as they are not appointed by the individual members?
Paper writers View: It would be within the Rs.7,500/- as expenses are also covered not only 3rd party reimbursements.
j. Whether the input tax credit reversed by those paying beyond Rs.7,500/- in past is eligible if RSWA choose to pay the GST on gross amount?
Paper writers View: ITC has several restrictions especially with regard to time. ITC for 2017-18 is not available as per the law today.
[However again this restriction should be read down by the courts.]
Discussion on Legal Validity
Formation of associations or unions is a fundamental right guaranteed by the Constitution to its citizens. Many clubs or associations are formed either for recreation, philanthropy or other purpose. Clubs or associations may be registered as a society, trust, company or it may even be an unregistered club/association.
Taxing the activities of the clubs or associations has engaged the fertile imagination and attention of tax gatherers for a long time be it sale of goods or provision of services or income earned. In the case of incorporated clubs, it acts as an agent of its members investing its own money for preparing things for consumption of the principal and later recouping himself of the expenses incurred. Mere registration under a statute may not confer the status of incorporated body even if it could acquire property and entails certain other statutory privileges.
In a Laymen’s language, Resident welfare association (RWA) is an association that represents the interest of residents of a specific urban or sub-urban locality. As a collective body, RWA would be supplying certain services to its members like collecting statutory dues from its members and remitting to statutory authorities, maintenance of the building, security etc.
In terms of sec 2(16) of Maharashtra Co-operative Society Act, 1960, ‘housing society’ means a society, the object of which is to provide its members with open plots for housing, dwelling houses or flats; or if open plots, the dwelling houses or flats are already acquired, to provide its members common amenities and services.
The scope of supply (sec 7 of CGST Act, 2017) includes activities mentioned in Schedule II. Entry 7 of the Schedule II provides that supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration would be considered as a supply of goods.
Further, the definition of 'business' in sec 2(17) of CGST Act includes the provision by a club, association, society, or any such body (for a subscription or any other consideration) of facilities or benefits to its members. RWA being covered in the definition of the business and the scope of supply, RWA’s could claim the following options under GST for the monthly collections made from the members.
a. Mutuality concept
b. Reimbursement of expenses
c. Availing exemption of Rs.7500/- per month from 25th January 2018.
Option 1: Principle of mutuality:
The principle of mutuality is based on the theory that a person cannot make profit out of himself and similarly, a mutual association cannot make profit out of itself. The principle, however, does not prevent such an association from doing business with some of its members because, in that case, the association must be deemed to do the business not by itself but with others who are different entities.
It is also well settled that, in order that the principle of mutuality should come into play, there must be an identity between the contributors to the fund and the participators in the fund. The essence of mutuality lies in the return of what one has contributed to the common fund. It is essential that all contributors to the common fund must be entitled to participate in the surplus and all participators must be contributors to the common fund and not only that all participators must be entitled to contribute. There is an absence of basic ingredient of existence of two parties, which is supply from one person to another.
Under GST, the supply of goods by an association to its members would be deemed to be a taxable supply (refer cl 7 of Schedule II). This would be in accordance with Art 366(29A)(e) of the Constitution. Interestingly, Schedule II does not speak about supply of service to members by a club or association.
In Matunga Gymkhana Tahnee Heights Co-op Hou Soc Ltd 2015-TIOL-108-CESTAT-MUM, CESTAT, relying on Ranchi Club and Sports Club of Gujarat vs. UOI 2013-TIOL-528-HC-AHM-ST held services to members of club or cooperative housing society is not service by one to another not chargeable to service tax. Both the cases relied upon are presently pending before Supreme Court where the department has filed appeal. These decisions are under earlier service tax law and mutuality might need to be judicially tested and it might take many years [8-9 years] for final clarity to emerge under GST law. However, relaying on the mutuality concept would be highly risky under GST as there are no settled cases.
Option 2: Reimbursement of expenses:
Discharging GST on the gross revenues less the expenses incurred as a pure agent for sourcing of goods, sinking fund expenses for specific assets replacement- lifts & services [such as security, house keeping, my gate, lift/ DG maintenance etc.] provided pure agent conditions should be satisfied. The exclusion of expenses incurred as a pure agent could be claimed only when the recoveries made are based on an actual consumption basis using cost accounting standards of allocating costs. Presently, the recoveries are based on a presumptive basis such as recovery based on floor area of flats which may need examination. The balance amount would be liable to GST, subject to threshold limit of Rs. 20 Lakhs.
Option 3: Availing exemption UPTO Rs.7500/- per month:
There is an unconditional exemption given in notification no. 12/2017-CGST(Rate) vide so no. 77 which exempts the service by an unincorporated body or a non-profit entity registered under any law for the time being in force, to its own members by way of reimbursement of charges or share of contribution (a) as a trade union (b) for the provision of carrying out any activity which is exempt from the levy of GST; or (c) up to an amount of Rs. 7,500/- per month per member for sourcing of goods or services from a third person for the common use of its members in a housing society or residential complex. The exemption was up to Rs. 5000 per month per member for sourcing of goods or services from a third person for the common use of its members in a housing society or residential complex from 1.7.2017 to 25.1.2018.
Note: When there is an exemption under GST, it is mandatory to claim it and there is no option to pay GST on the gross amount collected.[ Another draconian provision where the tax payer cannot even opt to play safe] GST on the supplies made to members which are specifically exempted vide notification: RWA could exclude in computing Rs. 7500 limit per month per member, the supplies ONLY which is separately traceable and collected from each member.
Further, such charges could be excluded from the value of the supply citing pure agent of the members, which would be supported by the third-party bills addressed to members. Eg: water metered and billed to each member, citing it is goods and not charge GST as it is an exempt supply and may not be included in the exemption limit of Rs 7500 per month per member.
Clarification issued vide circular in the erstwhile ST regime:
Circular no. 175/01/2014-ST clarified that if the contribution exceeds Rs.5,000/- per month per member the entire contribution is liable to tax and the assessee cannot avail the exemption up to Rs. 5000. However, it is to be noted that the said circular was issued under the erstwhile tax regime might not have impact under the GST law.
Further, it was held in the Supreme Court in case of Minwool Rock Fibres Ltd [(2012) 278 ELT 581 (SC)] it was held that circulars / instructions issued by CBE&C not binding on Assessee, Quasi Judicial authorities and courts. Thereby, the said clarification issued by the CBE&C vide circular may not be applicable under GST regime and exemption upto Rs 7500 per member per month can be availed earlier and also now.
Input tax Credit: RWA’s could avail the ITC only to the extent proportionate to the taxable supplies. Thereby, to the extent of the exempt supplies of Rs 7500 per month per member, ITC has to be reversed by the RWA.
Issues and solutions- As per the Act (not as per illegal Circular issued):
Q1. Whether GST has to be collected from all the members?
A. GST has to be collected from members whose monthly maintenance charges exceed Rs 7500 per member per month.
Q2. Whether GST has to be collected on the entire amount or on the amount which is in excess of Rs 7500?
A. GST has to be collected only on the amount exceeding Rs 7500 per member per month and not on the entire maintenance charges collected.
Q3. Whether the exemption of Rs 7500/- per month per member is mandatory to claim?
A. Yes, when there is an exemption provided under GST, it is mandatory to claim and there is no option to pay GST on the gross amount collected from members.
Q4. Whether the sinking fund/corpus fund would be subject to GST?
A. Where the said funds are collected as deposit, GST would not be applicable. When such fund is not collected as deposit instead when it is collected as part of maintenance, then liable to GST subject to Rs 7500 pm per member.
Q5. Whether the exemption is applicable only if the maintenance activity is not outsourced to third party service provider?
A. Where third option is adopted, the exemption is applicable only to the extent of contribution of Rs. 7500 pm per member for sourcing of goods or services from a third person for the common use of its members. In short, exemption is applicable to extent of outsourced goods/services provided by third person for common use of members of assn.
Q6. Whether the input tax credit could be taken for the payment of GST?
A. When RWA opts to pay GST on net revenues after claiming exemption, then RWA would be entitled to take eligible ITC of GST paid to third parties, which would be proportionate to taxable supplies.
Q7. Whether interest charges on delayed maintenance (arrears) is liable for GST?
A. If not opted for mutuality concept, this is income could be taxable to GST in absence of exemption/exclusion of the same. The exemption of Rs.75,00 per member per month is not available as these receipts are not against common use of its members, but for specific services to its members.
Q8. Whether association could take deposits from its residents and expense them?
A. When amount is collected as deposit, then it is not taxable to GST until time that it is appropriated towards the taxable supply. Where the deposit is appropriated towards taxable supply, GST would be levied.
Q9. Whether funds collected along with the maintenance charges for the purpose of celebrating the festivals/ programmes be liable to GST?
A. The goods/ service used for celebrating the festivals / programmes in RWA are in the nature of sourcing of goods or services from a third person for the common use of the members. The charges collected for celebrating the festivals / programmes though not part of the membership charges, would be exempt subject to Rs 7500 per month per member. Where the amount exceeds Rs 7500, RWA is liable to pay GST. However if amount collected separately by those who participate, it cannot be said to be from all and it is not common expense.
Q10. Whether GST is liable on membership fees received by RWA?
A. The GST is applicable to all the incomes received from the outsiders. In the instant the income that is membership fees is received by the non-member for becoming the member of RWA. Hence membership fees collected from RWA is leviable to GST.
Q11. Whether water and electricity charges collected from the members are liable to GST?
A. Water and electricity charges collected from members would subject to GST as under:
• Specific use of the members: The exemption of Rs 7500/- per month per member is only for commonly procured goods and services such as water and electricity. Where, the water & electricity charges are collected and paid based on the metered usage of the members to the third-party vendors, by RWA, such charges could be excluded from the value of the supplies of RWA citing pure agent exemption, where all the conditions of pure agent are satisfied.
• Common use: Where water and electricity charges are collected from the members for the common use, it would be included in the exemption limit of Rs. 7500/- per member per month. Water charges for the common use of the members cannot be excluded from the exemption limit of Rs. 7500 for availing the specific exemption. Some experts have a different view on this aspect also.
Conclusion: In this regime where making law simple and ease of compliance is being focused on- this type of yo-yo changes by the tax administrators who react to some lobby or the other without application of mind, without their feet on the ground, sitting in glass houses, violating the very fundamental judicial discipline is not fair.
This brings uncertainty to the law and erodes the trust in Govt. doing the right thing. Is this what the officers want? A major question which keeps arising when unfair, illegal circulars are issued. Of course one could approach the Court or the Council - but how many RSWA would do that?
GST Council may take this issue sou moto and do justice. Government/ PM/ FM should immediately instruct to withdraw this circular until Council deliberates. Maybe the responsible officers for this chaos should be hauled up and penalized at least internally.
The author can also be reached at firstname.lastname@example.org
Adapted from a chapter in the Compendium of Issues & Solution - June 2019 - published by Wolter Kluver authored by Adv K.S.Naveen Kumar & CA Madhukar N Hiregange.