MARCH 06, 2019

By S Murugappan, Advocate, Chennai

WAY back when service tax was introduced in 1994, it covered only a few services. Over the years it was expanded to include any type of human activity within its ambit and the number of services crossed the one hundred mark. Among the services the central government wanted to tax, services provided by clubs to its own members also were included. A club is not different from its members and there is mutuality of interest. Hence the levy on services provided by clubs was challenged and in the Ranchi Club case - 2012-TIOL-1031-HC-JHARKHAND-ST the High Court of Jharkhand at Ranchi held that in view of the mutuality principle if a club provides any service to its members then it is not a service by one to another and declared the levy illegal. A similar judgement was rendered by the Gujarat High Court in the case of Sports Club of Gujarat Ltd - 2013-TIOL-528-HC-AHM-ST and there also it was held that the levy is ultra vires and beyond the legislative competence of Parliament. Government of India has gone in appeal against these judgements before the Supreme Court and as of now these are pending determination of taxability.

Much water has flowed under the bridge since then. Definitions were tinkered to overcome the effect of these judgements and after Service Tax, when GST was introduced from July 2017 the same principles were followed. Or in other words, services provided by a club or an association to its members by obtaining contributions or subscriptions from the members, now attract GST.

During service tax regime, though services provided by a resident welfare Association (RWA) were subjected to tax, the government was a little considerate and an exemption was made available when the individual contribution of a member was up to Rs.5000/- per month. This was besides the basic exemption of Rs.20 lakhs turnover in a year available for an association for its activities. This was continued in the GST regime also.

However, after the switchover to GST, doubts were raised that the tax liability on the services provided by RWAs will go up. In this context government of India came out with a Press Release dated 13th July 2017 clarifying that RWAs will be required to pay GST on monthly subscription charges from its members only, if such subscription is more than Rs.5000/- per member and the annual turnover by way of supplying of services and goods is more than Rs.20 lakhs in a year for the Association. It was clarified that since tax credit is available on various goods such as generators, water pumps etc as well as input services, tax liability under GST regime will not be more. It was also clarified that there is ‘no change made to the services provided by the housing societies to its members in the GST era'.

The exemption as provided above in terms of notification 12/2017-Central tax (rate) dated 28th June 2017 reads as follows.

"In exercise of the powers conferred by sub-section (1) of section 11 of the Central Goods and Services Tax Act, 2017 (12 of 2017), the Central Government, on being satisfied that it is necessary in the public interest so to do, on the recommendations of the Council, hereby exempts the intra-State supply of services of description as specified in column (3) of the Table below from so much of the central tax leviable thereon under sub-section (1) of section 9 of the said Act, as is in excess of the said tax calculated at the rate as specified in the corresponding entry in column (4) of the said Table … … … …

In the meeting held on 18th January 2018 the GST Council recommended further relief to RWAs by increasing the limit from Rs.5000/- to Rs.7500/- per month. In that context, Ministry of Finance, Government of India issued a press release on 7th February 2018 informing the public that RWAs shall be required to pay GST on monthly subscription charges from its members if such subscription is more than Rs.7500/- per month per member. Please also refer notification 2/2018-CTR dated 25.01.2018.

From the clarifications provided by the government as above it was generally understood that if the individual contribution is above Rs.7500/- (initially Rs.5000/-), then exemption is not available.

However, here comes the twist and climax.

When GST was introduced, the Central Board of Excise and Customs released a series of flyers reportedly to provide an overview of GST and to promote the understanding of its concepts by the general public. One such flyer relates to 'GST on cooperative housing societies' and in that the board clarified that if the monthly contribution is Rs.6000/- by a member to the RWA, then GST will be payable on the amount in excess of Rs.5000/-, that is, on Rs.1000/- only. It was against the general perception that exemption itself is not available if the individual contribution exceeds Rs.5000/-.

Now we have the anti-climax.

All the GST flyers are qualified by a ‘disclaimer'. The disclaimer proclaims that they are for ‘training and academic purposes only' and that the information in these flyers is intended only to provide a general overview and is not intended to be treated as legal advice or opinion. It further states that for greater details, one should refer to the Acts, rules, notifications etc.

If public cannot act on the basis of the guidelines in these flyers, purportedly propounded by the government itself to promote understanding of GST, but should go to the respective Acts and Rules for proper guidance, then it is not known what purpose these flyers made available to the public are intended to serve. It can be equally said that if they are not in conformity with the provisions of law, then instead of informing the public they are misinforming and misleading them.

It is quite possible that many associations entertain a view that in respect of all contributions, exemption can be availed up to Rs.7500/- now and only the balance amount in excess of Rs.7500/- contributed by each member will attract tax. Such a view appears to be flawed. If one goes through the notification it will be clear that it provides exemption for specific services and that one such service is service by an association to its one members and when the contribution is up to an amount of Rs.5000/- (now Rs.7500/-) per month per member for sourcing of goods and services from third parties. The exemption does not use the expression ‘the first Rs.5000/-' (or Rs.7500/-) per month per member. Then, in such a case it can give rise to a different meaning. The entry in the notification as on date has the following limbs.

1) provision of a service by an entity.

2) exemption to such a service provided by that entity

3) provision of such a service is by way of reimbursement of charges/contribution.

4) such reimbursement is up to an amount of Rs.5000/- (now Rs.7500/-) per member for the purpose of sourcing goods and services from third parties.

A harmonious reading of the various limbs/clauses of exemption as mentioned above will clearly show that when the monthly contribution of a member for sourcing goods and services from third parties is up to Rs.5000/- / Rs.7500/-, exemption can be availed. When this exceeds the amount specified, there is no exemption at all. Or, in other words, in such cases the entire contribution given by a member per month will attract GST.

During the service tax regime, notification 25/2012-Service Tax dated 20th June 2012 provided for a similar exemption. The entry in the above notification is, word by word, the same as it appears in the present notification as can be seen from below.

"28. 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 service tax; or

(c) up to an amount of five thousand rupees 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 a residential complex;"

In the context of the above service tax notification, government of India provided a clarification through a Circular No. 175/01/2014-S.T. dated 10th January 2014 and in that circular it was clarified against Point no. 1 that if per member contribution exceeds Rs.5000/- per month then the entire contribution of such members would be ineligible for the exemption.

Thus as can be seen from the above, the clarifications under various circulars and the overview given in the GST flyers are contradictory and create much confusion. Government of India is promoting GST as a ‘good and simple tax'. But, as an example, the levy of tax on RWAs and the scope of the exemptions as given in the notifications and as clarified in the circulars, however suggest otherwise; and this needs immediate rectification.

Notwithstanding the fact that tax credits are available to an association, levy of tax itself is a burden on welfare associations when they provide services to their own members and the legality of such a levy under the erstwhile law is pending determination before the Supreme Court. In that context, if the associations act based on the assumption that for every contribution there is an exemption up to Rs.7500/- and only balance will be subject to tax then at a later date if the authorities take a different stand and slap demands on the Associations, it will be a miserable situation.

Besides the tax demand, there will be interest element as well as penalties. In such a situation, the association office bearers may have to keep the members' welfare at the back burner and knock at the doors of Courts as well as ponder over as to how to collect extra funds to pay taxes, interest and penalties that are demanded several years afterwards. One should add to such a scene that may unfold the situations where, by that time, many owners sell the flats and leave the association, tenants relocate and in this way, many residents who were there during the relevant period are no more members of the RWAs and not available to cough up these demands.

Then, it will be ‘confusion worse confounded'.

(The views expressed are strictly personal.)