Lathi & Co.

GST on Co-operative Housing Societies and Resident Welfare Associations

• Background:

The Finance Act, 2005 introduced, for the first time in 2005, a Service tax levy on ‘Club and Association services’ with effect from 07/06/2005. The levy was widely litigated, primarily on the grounds of mutuality with quite a few rulings in favour of the taxpayers. More importantly, the concept of mutuality was upheld by the Supreme Court

Negative list regime under Service tax came in to force from July 01, 2012 and for the first time since introduction of Service tax, the word ‘Service’ was defined. Explanation 3 to the said definition defined a member of an association and the said association as distinct persons in an attempt to override the concept of mutuality. While this explanation also existed in the pre-negative list regime, the word ‘Service’ itself was not defined before the negative list regime.   

• GST on resident’s welfare associations (RWA):

With introduction of GST from July 01, 2017, provisions similar to those existing under Service tax law were introduced under GST law. However, the scope of ‘Supply’ specifically included supplies made by an association to its members.

Scope of supply: the scope of supply for the purpose of GST includes sale, transfer, barter, exchange, licence, rental, etc., made in the course or furtherance of business;

Business: Business is defined as any trade, commerce, adventure, etc., whether or not for a pecuniary benefit. Thus, ‘Business’ also covers activities carried out without any intention of earning a profit or a surplus, whether such surplus is distributed amongst the owners/members or not. Further, ‘Business’ specifically includes the provision of facilities by a club, society or such association to its members for a consideration.

• Can the housing society or RWA take shelter of Mutuality principle for not levying GST –

We have discussed that various courts and tribunals have upheld the doctrine of mutuality in case of mutual benefit societies such as clubs, RWA and similar associations, despite there being a specific deeming fiction created under the negative list regime for levy of Service tax on the services rendered by the said associations. These rulings, however, pertain to the earlier laws, and most of them pertain to the pre-negative list period.   

We have discussed in paragraph 2, that GST law has effective provisions to levy tax on supplies of goods and services made by a mutual benefit association to its members for a consideration.

Further, we find that recent rulings of Authority for Advance Ruling as well as the Appellate Authority for Advance Ruling have held the services of mutual benefit associations as taxable under GST.

In a very recent advance ruling in the matter of Rotary Club of Mumbai Queens Necklace [GST-ARA-118/2018-19/B-46 Dated 30/04/2019, Annexure 2] the AAR observed –

• The club and the members are distinct entities,

• The GST law has given very wide connotation for services, which will cover any activity other than which involves goods, money and securities. Therefore, the activity of the club conducted exclusively for the club members can clearly be considered as service being provided by the club to its members.

• any membership fee collected by the club from its members will definitely be understood as ‘consideration’ as the same has been paid for supply of services.

In The Association of Inner Wheel Club Of India [Appeal Case No. 11 /WBAAAR/Appeal/2018, Annexure 3] the West Bengal Appellate Authority for Advance Rulings observed –

• Inner Wheel Club membership can only be availed against payment of annual membership fees, renewable annually. Only the members are granted various facilities and/or benefits, enabling them to attend conventions/meetings for the furtherance of the objectives of the organisation. Such facilities/benefits are not available to the non-members of the Organisation.

• Schedule II of GST Act enumerates activities which are to be treated as supply of goods or as supply of services. It states in para 7 that supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration shall be treated as supply of goods – A conjoint reading of various provisions of the law implies that supply of services by an unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration shall be treated as supply of services.

• There was no infirmity in the ruling pronounced by the West Bengal Authority for Advance Ruling – AAR decision upheld.

While advance rulings apply only to the applicant thereof, such rulings do carry a persuasive value and provide an insight to the departmental view on a particular matter.

Based on provisions of the act and the rulings of AAR/Appellate authorities, it is our view that a Residents Welfare Association cannot claim shelter under doctrine of mutuality under GST law.  

• Whether the housing society or RWA is required to obtain GST registration –

Section 2(112) of The CGST Act, 2017 defines ‘Turnover in state’ as under –

“turnover in State” or “turnover in Union territory” means the aggregate value of all taxable supplies (excluding the value of inward supplies on which tax is payable by a person on reverse charge basis) and exempt supplies made within a State or Union territory by a taxable person, exports of goods or services or both and inter-State supplies of goods or services or both made from the State or Union territory by the said taxable person but excludes central tax, State tax, Union territory tax, integrated tax and cess;

Section 22 of The CGST Act, 2017 mandates compulsory registration in all cases where the turnover in state exceeds Rs.20 Lakhs annually, in case of Services. The turnover limit in case of a supplier of goods is Rs.40 Lakhs with effect from April 01, 2019. Thus, if the housing society or the RWA has rendered services (including exempt services, exceeding Rs.20 Lakhs,  quite obviously, GST registration will have to be obtained.

Further, specifically in case of a Residents Welfare Association, an additional exemption has been given in cases where the monthly maintenance charges [consisting of reimbursement of expenses and share of contribution] does not exceed Rs.7,500/- per month per residential unit. [Rs.5,000/- per month up to 25/01/2018]. From the various components charged by the RWA to its members, the amount to be considered for the purpose of exemption of Rs.7,500/- or Rs.5,000/- as the case may be, is as under –

Covered under Monthlyexemption of Rs.7,500/- (Rs.5,000/- up to 25/02/2018)	Pure agent, hence not subject to GST
Column A	Column B
Security charges	Local taxes on land or premises
Sweeper’s salary	Property Tax
Garbage bags	Repair / Reconstruction Cess(to the extent levied by local authority and payable as statutory dues)
Insurance	Ground Tax
Lift (AMC)	Water charges (allocable to members personal use)
Intercom (AMC)
Cleaning of water tanks
Miscellaneous Expenses
CCTV (AMC)
Salary to manager
Auditor’s Fees
Garden water (considered as facility provided to members for common area)
Electricity charges (considered as facility provided to members for common area)
Repair Fund
Fire Extinguisher Servicing

We refer to Circular No 109/28/2019- GST dated 22/07/2019, Annexure 4, wherein the TRU has clarified on the registration requirements in case of a Residents Welfare Association. Accordingly, the position will be as under –

Monthly maintenance, i.e., amount in Column A	Annual turnover excluding amount in Column B	Registration requiredYes/No
Less than Rs.7,500/-	Less than Rs.20 Lakhs	No
Less than Rs.7,500/-	More than Rs.20 Lakhs	No
More than Rs.7,500/-	Less than Rs.20 Lakhs	No
More than Rs.7,500/-	More than Rs.20 Lakhs	Yes
More than Rs.7,500/- in case of some units and less than Rs.7,500/- in case of other units	Less than Rs.20 Lakhs	No
More than Rs.7,500/- in case of some units and less than Rs.7,500/- in case of other units	More than Rs.20 Lakhs	Yes. GST will have to be levied in case of units where the monthly maintenance exceeds Rs.7,500/-. GST will apply on the entire amount of monthly maintenance in such cases and not only on the amount exceeding Rs.7,500/-. [For example, if monthly maintenance charge is Rs.8,000/-, then GST @ 18% will be Rs.1,440/-] Refer Circular No.109/28/2019- GST dated 22/07/2019.

[Note: The value of supplies shown in column B, pure agent supplies, will be excluded in computing the threshold limit of Rs.20 Lakhs.]

• Input Tax Credit –

Section 17 of The CGST Act, 2017, read with Rules 42 and 43 of The CGST Rules, 2017 provide that Input Tax Credit (ITC) will be eligible to a supplier if;

1. The inward supply is used for the purpose of business,
2. The inward supply is used for the purpose of taxable output supply,
3. The inward supply is used for the purpose of ‘Zero Rated’, i.e., Export and SEZ supplies.

As you will note, any input supply used for the purpose of making a non-business outward supply or for making any exempt outward supply is not eligible as Input Tax Credit. In case of the housing society or RWA, if there are outward supplies

on which the benefit of any exemption has been taken, for example, exemption of Rs.7,500/- per month on maintenance charges, such supplies shall be considered as exempt outward supplies and the housing society or RWA will not be eligible to claim ITC related to such exempt outward supplies.

In order to determine the proportion of eligible and ineligible ITC, Rules 42 and 43 require that from the gross ITC available, following break-up has to be determined –

1. ITC used directly for the purpose of taxable outward supplies,
2. ITC used directly for the purpose of exempt outward supplies, and,
3. ITC used for both, taxable as well as exempt outward supplies.

Once the above break-up of ITC is determined, broadly, the manner in which ITC can be taken is as under –

Nature of ITC	Manner of utilisation
ITC used directly for the purpose of taxable outward supplies	Full ITC can be utilized
ITC used directly for the purpose of exempt outward supplies	ITC cannot be utilized
ITC used for both, taxable as well as exempt outward supplies	ITC can be utilized on a proportionate basis

Do note, that the above is only a broad classification for understanding purpose. Rules 42 and 43 specify a detailed formula for calculation of such ITC. Detailed discussion of the methodology of Rules 42 and 43 is not made in this article.

In view of the above, the housing society or RWA will have to restrict its ITC utilization to the extent that the ITC is related to taxable outward supplies. The ITC related to exempt outward supplies and non-GST supplies (such as water and electricity) will have to be reversed. The actual amount of such reversal will depend on facts of the case and may vary from month to month.

• Blocked credits –

Housing societies or RWA incur significant expenditure on repairs of building. Consequently, the GST charged by the repair contractor will also be significant. It must be noted that the Input Tax Credit of GST paid on construction works contract services is a blocked credit. Refer Sr.No.5 hereunder. The restriction is subject to conditions –

1. The ITC pertains to input services of works contract (repair, alteration, renovation, etc., of building),
2. The restriction applies to the extent that the relevant expenditure is capitalized in the books of account of the society or the RWA,
3. As a corollary, if the entire expenditure on repairs is treated as a revenue expense, the question of ITC restriction under this clause will not arise.

With reference to ITC of works contract services, a recent advance ruling is worth examining. We refer to the matter of Las Palmas Co-Operative Housing Society Limited (GST AAR Maharashtra). The said housing society applied for an advance ruling on the question whether the society could avail the ITC on installation/replacement of lift (elevator) on the premises of the society. Answering the question in the negative, the AAR observed –

“Explanation to Section 17(5) is very clear. ITC is available for “plant and machinery”. Plant and machinery means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes – Land, building or any other civil structures.

5.8 The lift, after erection and installation is an immovable property because it becomes a part of an immovable property i.e a building. In other words it is to be considered as an integral part of the building itself. It is not a separate part of the building. When any person speaks of such a building, he also includes the lifts as an integral part of the building, like storage water tanks, etc.

To summarize, Manufacture, Supply, Installation and Commissioning of Lifts/ Elevators is in the nature of Works Contract activity which results in creation of an immovable property. Hence in view of the above discussions and Explanation to Section 17 of the CGST Act, we are of the opinion that the applicant is not entitled to ITC of GST paid on replacement of existing Lift/Elevator, in its premises.” [Emphasis added]

The AAR has considered the lift as a part of immoveable property, i.e., the building of the housing society and concluded that the society was not entitled to avail of the ITC on lift replacement.

Apart from works contract services, some other blocked credits are as under –

Sr.No.	Nature of ITC	Conditions under which ITC can be taken
1	Motor vehicles with a total seating capacity of up to thirteen persons, including ITC on services of hiring or renting of the vehicles, general insurance, servicing, repair and maintenance of the vehicles	The vehicles are purchased for reselling, The vehicles are used for transportation of passengers,The vehicles are used for imparting training
2	Vessels and aircraft, including ITC on services of hiring or renting of the vessel or aircraft, general insurance, servicing, repair and maintenance of the vehicles	The vessel or aircraft; is purchased for reselling, is used for transportation of passengers,is used for imparting trainingis used for transport of goods
3	food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, life insurance and health insurance:	The inward supplies are used in providing taxable output supplies in the same category of services or if such supplies are used in providing a taxable, composite or mixed supply.
4	travel benefits extended to employees on vacation	If it is obligatory under law for the employer to provide such benefits
5	works contract services for construction of an immovable property, including re-construction, renovation, additions or alterations or repairs	In cases where the construction cost is not capitalized in books

• Quarterly billing –

We find that many housing societies or RWA prefer to issue quarterly invoices.

Rule 47 of the CGST Act, 2017 prescribes the time limit of thirty days from the date of rendering (supply) of services, for issue of Tax Invoice.

In cases where the invoices are issued quarterly, in advance, to illustrate, the invoice for the period April 2020 to June 2020 is issued in the month of April 2020, it will not be in violation of Rule 47 as discussed above. Hence, quarterly invoices may be raised.

Further, raising of quarterly invoices will not impact reversal of ITC, if any, because –

1. In the months that there is no outward supply, the provisional reversal ratio of the previous month has to be applied in accordance with proviso to Rule 42, and,

• The housing society or RWA, in any case, has to annualise the reversal of ITC for the entire year before the return for September of the following year is filed. Hence, on an annual basis, the ITC reversal will not be impacted.    

We trust the above is of help to housing societies and resident’s welfare associations. Questions or comments of readers on this article are welcome.

Dipen Lathi,
Chartered Accountant
www.Lathico.com

DISCLAIMER : No assurance is given that the revenue authorities/ appellate authorities/ courts would concur with the views expressed herein. Our views are based on the existing provisions of law and our interpretation thereof. We do not assume responsibility to update the views consequent upon such changes, if any. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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© Dipen Lathi

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