Background
In the past under erstwhile service tax laws, several of the RWA’s had been citing mutuality concept to claim exclusion from tax net. The doctrine of mutuality states that when the contributors and the beneficiaries are the same, whereby the services are provided by members for themselves and consumed by the members, the levy of tax fails, as there is no distinct service provider and service receiver.
There were also numerous decisions under erstwhile service tax laws, starting from Ranchi Club Ltd vs.CC of CE&ST, Ranchi and Others 2012(26) STR 401(Jharkhand) wherein the High Court had held that in case of a club, it is mutuality which is constituting it. There are no two persons or two legal entities in activities of a members club. Thus, if any services are provided by a club to its members, it is not liable to tax. This decision was followed in Sports Club of Gujarat Ltd (2013-TIOL-528-HC-AHM-ST). These matters are presently pending before Supreme Court where the department has filed an appeal.
Post July 2017, in GST regime, the facility or benefits extended by the RWA to its members is specifically included in the definition of 'business'. Further the decisions given above are under earlier service tax law and mutuality may need to be judicially tested and may take many years for final clarity to come under GST law. Consequently GST maybe demanded on the charges paid by members towards maintenance post July 2017 onwards. There could be a higher risk to take the shelter of mutuality to claim that services provided by the association to members are not taxable under GST regime.
Further under GST, there is unconditional exemption upto Rs. [5000]/7500 [ from July 2017 till 25.1.2018] 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. RWA’s were claiming the said exemption and paying tax only on the excess over said limits.
Recent Circular no. 109/28/2019- GST, has clarified that GST would be applicable on entire amount when the contribution for maintenance charges by members exceeds Rs.7500 pm per member. This seems to be contrary to earlier clarification in the sectoral flyer relating to Co-operative Housing Society issued by the CBIC during 2017 wherein it was specifically mentioned that only the amounts in excess of Rs. 5,000 [or Rs. 7,500 (as presently applicable) would be liable to GST.
This has once again created confusion on eligibility to exemption from GST to Residential welfare association’s (RWA’s) given based on monetary limit of contribution. The same dispute existed under service tax where a similar clarification, [as the Circular no. 109/28/2019- GST], was given vide circular No. 175/01/2014-ST dated 10.01.2014.
In this backdrop, the paperwriter has examined GST implications of the latest circular and validity of same.
Various aspects covered in Circular no. 109/28/2019- GST
Before getting into the latest circular and its validity, we would recap on the exemption in notification no.12/2017-CT(R). Sl. no. 77 provides an unconditional exemption which exempts:
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) ..........;
b) ...............................; 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 upto 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 An unconditional exemption has to be mandatorily claimed and there is no provision to forego same.
The recent circular109/28/2019- GST has clarified as follows about sl no.77(c)-
a. GST payable on the amount exceeding Rs. 7500/- or the entire amount: In case the charges exceed Rs. 7500/- per month per member, the entire amount is taxable.
Paper writer comments:
Eligibility to exemption when the contribution is in excess of Rs 7,500/-: We examine the validity of this clarification, as it appears to be purely a revenue augmentation exercise of the tax administration. This circular has clarified that if the contribution exceeds Rs 7,500/- per month per member the entire contribution is liable.
On the other hand, in considered view of paper writer, it exempts the contribution upto Rs 7,500/- pm per member for sourcing goods and services from third party for common use of members. The term 'upto' in common understanding means- something is less than or equal to but not more than a stated value.
It has nowhere mentioned in the notification that the exemption benefit upto Rs 7500 pm is not available to member where the contribution per month for member exceeds Rs 7,500/-. Therefore only over and above that limit should be liable.
Reading what is not specifically provided for in notification may not be in line with the intention of the law. To that extent the circular is not in line with the law and consequently non est [invalid] in law. This was also held in Ratan Melting Wires Melting Industries [2008 (12) STR 416 (SC)]. This decision has persuasive value under GST as well.
To summarise, in paper writers view, the exemption for the contribution upto Rs 7,500/- pm per member for sourcing goods and services from third party for common use of members, continues to be available.
Other aspects covered in circular:
b. GST exemption per apartment/per person: The ceiling of Rs. 7500/- per month per member shall be applied separately for each residential apartment owned by him [ this is the correct interpretation of law].
c. Upper limit for the exemption: Share of contribution up to Rs. 7500/Rs 5000 prior to 25.1.2018 per month per member for providing services and goods for the common use of its members in a housing society or a residential complex are exempt.
d. Exemption from registration: If aggregate turnover of an RWA does not exceed Rs.20 Lakh in a financial year, it shall not be required to take registration and pay GST, even if the amount of maintenance charges exceeds Rs. 7500/- pm per member.[ This is in line with the GST provisions].
e. Input tax credit where the amount charged is more than Rs. 7,500/- per month per member: RWA are entitled to take ITC of GST paid by them on capital goods (generators, water pumps, lawn furniture etc.), goods (taps, pipes, other sanitary/hardware fillings etc.) and input services such as repair and maintenance services.
Advance ruling-Claim of GST exemption by RWA
TVH Lumbini Square Owners Association[2019-TIOL-226-AAR-GST]
Facts: Applicant RWA is registered under Societies Act, claiming exemption of Rs.7,500/- as per S.No.77 of Notification 12/2017-Central Tax (RATE) dated 28.06.2017
Issue: RWA has sought a ruling on the question as to whether ‘if the monthly charges payable by a Member of the Association exceeds Rs.7500/- per month, in the context of exemption as per Sl. no. 77 of 12/2017-CTR, the applicant is liable to pay GST only on the amount in excess of Rs.7500/- (effective 25.01.2018)(previously Rs.5000/-) or on the entire amount' .
Held: If a service by the applicant to its members by way of reimbursement of charges or share of contribution for sourcing of goods or services from a third person for the common use of its members is above 7500 rupees per month (earlier Rs.5000 up to 24.01.2018), hence, such service is not exempt. Such services are fully chargeable to GST at the applicable: AAR.
This ruling does not seem to be correct as it seeks to deny exemption which is clearly permitted to RWA. It maybe noted that Advance ruling is applicable only to assessee who has sought it and to his set of facts. It has limited validity for others. It maybe followed only when it is in line with the provisions.
Conclusion
To conclude, the recent clarification in circular has clearly gone beyond the law. The circular which is not in line with the law is not binding on assessee. However the revenue department may seek to restrict the claim of exemption citing said circular.
It maybe noted this exemption is not available in case of receipts from members for the services provided exclusively to such members and not for the common use of members. The exemption would not be available in cases of charges collected for specific purposes like rent from clubs, advertisement incomes, etc.
In this article the paper writer has examined the validity of the circular. In case of any further queries mail at roopa@hiregange.com.
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