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September 24, 2020

Maintaining facilities at the layout from the funds collected from the members of the Society is a service attracting GST – AAR

by shivam jaiswal in GST, Legal Court Judgement

Maintaining facilities at the layout from the funds collected from the members of the Society is a service attracting GST – AAR

Under GST, Supply is considered a taxable event for charging tax. The liability to pay tax arises at the time of supply of goods or services. Thus, determining whether or not a transaction falls under the meaning of supply is important to decide GST’s applicability. The GST council has fitted over 1300 goods and 500 services under four tax slabs of 5%, 12%, 18% and 28% under GST. Certain supplies are covered under Notification No.12/2017- Central Tax (Rate) Dated 28-06-2017 as amended by the Notification No.02/2018-Central Tax (Rate) dated 25-01-2018 are exempted from the levy of GST (i.e no GST will be charged on such supplies).

According to Entry 77 of the above notification, 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:

  • as a trade union
  • for the provision of carrying out any activity which is exempt from the levy of GST; or
  • up to an amount of Rs 7500 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.

are exempt from GST.

Let us refer to the case of Gnanaganga Gruha Nirmana (GST AAR Karnataka) where the issue under consideration was whether the activity of maintaining the facilities at the layout from the funds collected from the members of the Society is a service attracting GST or not.

Facts of the Case:

  • The applicant was a Housing Society registered under the Karnataka Co-Operative Societies Act engaged in the development and sale of Sites for its members.
  • The process of formation of Sites involved identification of land, which may be an Agricultural land and this agricultural land had to be converted into non-agricultural land from the prescribed authority.
  • Society had to secure plan approval from the appropriate Planning authority and execute the works like marking of the sites, formation of the roads, preparing and leveling of the roads, asphalting the roads, formation of drainage, securing water and electric connection to the layout as a whole and connecting the same to the individual residential sites.
  • Society had to develop Parks and other Civic Amenities in terms of the approved plan to make the sites developed, habitable one, and to ensure completion of the execution of all the other works in terms of the approved Plan.
  • After complete allotment of sites to its members in a layout, society had to handover the layout to the Local Municipal Administration (LMA) for maintenance and LMA took over the layout for maintenance in a period between 5 years to 25 years depending upon the time taken for allotment of sites to its member by the society.

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  • Besides this some of the Authorities imposed a condition that the layout would be taken over by them for maintenance only after the majority of the residents occupied the layout.
  • At the time of takeover, the entire layout should be in proper condition in terms of Power, Water, Roads and other Civic Amenities.
  • Most of the time the developmental work under taken in the layout damaged beyond repair and had to be re-done besides repairing wherever possible.
  • Society was not responsible for maintenance of the sites till the LMA took over the layout but it was expected that Society had to maintain the layout.
  • Some of allottees occupied the sites by constructing the building on their own, however, maximum number of sites were not occupied by the allottees and did not have superstructure built on them.
  • Even then, the layout had to be maintained until the LMA took over the same. All the maintenance activities involved considerable amount of costs which the Society could not afford as the Society was a Co-operative Society which worked on no profit and no loss basis. Therefore, Society collected the amount from its members for maintenance of the sites in the layout till the LMA took over the sites formally.

Applicant sought advance Ruling from the Authority of Advance Ruling (AAR) on the following;

  1. Is the activity of maintaining the facilities at the layout from the funds collected from the members of the Society a service attracting GST?
  2. If yes then, should the GST be paid even for the amount pertaining to the un-expired period, on the Society’s collection towards maintenance charges calculated on yearly basis or in one lumpsum for 10 years?
  3. The Society is collecting Water charges from the residents for recovery of charges for water. The entire cost of the water is recovered from the members on monthly basis, does it attract GST?
  4. Does the society have to pay GST for collecting lump-sum amount as endowment fund, the proceeds of which would be utilized for maintenance charges of the layout with an express condition that the amount would be returned to the Site owners upon the taking over of the layout by the local body as the Society would be utilizing only accretions to the endowment fund from year to year.
  5. In the event that any or all of the items from (1) to (4) is rendered taxable whether the same is exempt under Notification No 12/2017 entry no 77 respect of the value of the maintenance amount collected from the members of the society to the extent of Rs 7,500 per month?

Observations of the AAR on whether the applicant was a housing society or not

  • Housing Society is not defined under the GST Act. As per section 2(16) of the Maharashtra Co-operative Society Act, 1960 “housing society” means a society, the object of which is to provide its member 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 applicant, being the House Building Co-operative Society, is engaged in the development and sale of sites to its members for housing, is covered under the term “housing society” for the purposes of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017.
  • Also, as per section 2(17) (e) of the CGST Act 2017, provision by a club, association, society, or any such body (for a subscription or any other consideration) of the facilities or benefits to its members is a business.

Observations of the AAR on whether the maintenance of layout undertaken by the society is supply in terms of Section 7(1)(a) of the CGST Act 2017 or not

  • Section 7(1)(a) of the CGST Act, 2017 stipulated that any transaction to get qualified as ‘supply’, must contain the following three components:
  • The transaction must involve a supply of goods or services or both, such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made.
  • The transaction must be for a consideration
  • The transaction must be in the course or furtherance of business
  • The applicant is involved in the providing layout maintenance service to its members by supplying goods or services and hence the first condition is satisfied.
  • The applicant had admitted that they were receiving the amount from its members as consideration towards the maintenance of the layout and hence the second condition was also satisfied.
  • The facilities or benefits provided by the applicant to its member for consideration was a business as per section 2(17) of the CGST Act 2017 and hence the third condition was also satisfied.
  • Hence the activity of maintenance of layout by the applicant amounted to supply in terms of Section 7(1)(a) of the CGST Act 2017.

Observations of the AAR on Time of Supply

The liability to pay tax on services arose at the time of supply as per the provisions of section 13(1) of the CGST Act, 2017. Further, as per section 13(2) of the CGST Act, 2017 the time of supply of services shall be the earliest of the following dates:

  • the date of issue of invoice by the supplier, if the invoice is issued within the period prescribed under section 31(2) or the date of receipt of payment, whichever is earlier; or
  • the date of provision of service, if the invoice is not issued within the period prescribed under section 31(2) or the date of receipt of payment, whichever is earlier; or
  • the date on which the recipient shows the receipt of services in his books of account, in a case where the provisions of the above points do not apply:

Therefore, the time of supply of services shall be the earliest of the date of issue of invoice or date of receipt of payment.

The applicant utilised a part of this amount with its accruals, whenever they undertook maintenance work from the third person. Thus, the time of supply of service in this case was earliest of the date of issue of invoice to the applicant or date of receipt of payment by the service provider.

Observations of AAR on GST applicability of amount collected from its members

  • The applicant collected the amount either annually or once in ten years from its members and kept it as deposit, but was bound to refund to its members the amount unutilised at the time of transfer of the entire property to the civic authorities.
  • Therefore, the money collected was only in the form of deposit and did not take the character of advance for the services provided.
  • Hence, mere collection and deposit of money did not qualify either as supply of goods as per section 2(52) or as supply of service as per section 2(102) of the CGST Act, 2017 and taxability of the goods or services or both arose only at the time of supply of goods or supply of service or both.
  • Thus, the extent of amount utilized by the applicant towards the payment at the time of supply of service by a third person was liable for GST as per section 9(1) of the CGST Act, 2017.

Observations of the AAR on applicability of exemption under Entry 77

  • The applicant was a housing society falling under the entry No.77 of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017 as amended by the Notification No.2/2018-dated 25-01-2018.
  • As per Entry 77, services provided by the 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 up to an amount of Rs 7500 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 was exempted from the levy of GST.
  • Since the applicant was a housing society, this exemption was also applicable to the applicant.
  • However, the applicant was not collecting the reimbursement of charges or share of contribution from its members every month.
  • Instead they were collecting the charges either annually or once in 10 years and were keeping it as a deposit.
  • In such a situation, when the applicant utilised the amount from the deposit for sourcing goods or service from the third person for the common use of its member in the housing society, amount utilised in that particular tax period must be divided into number of members in the society and said amount per member.
  • If it did not exceed Rs 7500 in that tax period, such amount was exempted from tax as per entry No.77 of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017 as amended by the Notification No.2/2018-dated 25-01-2018.
  • If that amount per member in that tax period exceeded Rs 7500, then entire amount was taxable.

Observations of the AAR on taxability of water charges collected from the applicant

  • The applicant was collecting water charges from the residents of the layout towards the cost of pumping water from bore wells to overhead tank and also for management and maintenance of water distribution systems to each individual house on monthly basis.
  • As per entry no. 99 of the Notification No. 2/2017 -Central Tax (Rate) dated 28th June, 2017, water [other than aerated, mineral, purified, distilled, medicinal, ionic, battery, de-mineralized and water sold in sealed container] is exempt from GST.
  • Therefore, the supply of water is exempt from GST and the applicant is not liable to pay GST on water charges.
  • However, it was not clear from the submission of the applicant that whether the applicant was collecting water charges separately from its members or it was included in total contribution.
  • If water charges were collected separately, then it fell in entry 99 of the Notification No. 2/2017 -Central Tax (Rate) dated 28th June, 2017 which was exempt from GST.
  • In case water charges were included in the total contribution of each individual member in each month then it was covered under the entry No.77 of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017 as amended by the Notification No.2/2018-dated 25-01-2018.

Observations of AAR on whether the society has to pay GST for collecting lump-sum amount as endowment fund or not

In order to claim exemption under entry 77(c) of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017 as amended by the Notification No.2/2018-dated 25-01-2018, applicant should fulfil the following conditions:

  • Service should be by the RWA/ Housing society
  • Applicant/ Housing society should provide the services to its own members
  • Service provided by the applicant /housing society to its members should be against reimbursement of charges or share of contribution.
  • The reimbursement of charges or share of contribution should be up to Rs. 7500 per month per member.
  • Reimbursement of charges or share of contribution should be for sourcing of goods or services from a “third person” and
  • Such sourcing of goods or services should be for the “common use of its members” in a housing society or residential complex

Was exemption under entry 77(c) applicable?

  • In the instant case the applicant was collecting amount from the member who was selling the site and that amount is kept as endowment fund.
  • The applicant utilised the proceeds/ accretions of the endowment fund for sourcing goods or service from the third person for the common use of its members.
  • This amount did not amount to the contribution or reimbursement of amount from its members.
  • The exemption under entry 77(c) of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017 as amended by the Notification No.2/2018-dated 25-01-2018 was available only when the applicant received the amount from its members as contribution or reimbursement against the amount paid by the applicant for sourcing of goods or services from the third person for common use of its members.
  • Since the applicant utilising the amount which was collected from the member who were selling their sites, such contribution was not for providing any maintenance services, instead he was providing no-objection certificates and other clearances for the site sellers.
  • Hence such amount when collected amounted to a service and the applicant was liable to pay GST at 18% as such services are unclassified services covered under entry no. 35 of the Notification No.11/2017- Central Tax (Rate) dated 28.06.2017.
  • Hence the contributions of the members who are selling the sites and obtaining clearances from the applicant for such sale, were liable to GST.
  • Further, the endowment fund belonged to the applicant society and interest got accrued to this fund.
  • The amount spent out of this fund which belonged to all members, was for providing services to all the members and there was an express provision that any amount left as balance in the fund at the time of handover to the LMA, would be distributed to all the members, the amount debited to this account should also be taken proportionately as contribution of each the member and this should be reckoned while calculating the threshold of Rs.7,500 per member per month.

Therefore, in conclusion:

The activity of maintaining the facilities at the layout from the funds collected from the members of the Society is a service attracting GST.

The contributions collected by the applicant from the member of the housing society either annually or once in ten years, when utilized for sourcing of goods or service from the third person for the common use of its member, the amount utilised in that particular tax period, from both individual contributions and from the endowment fund, must be divided by recipients of such service in the society and if the said amount per member does not exceed Rs 7500 in that tax period, such amount is exempted from tax as per entry No.77 of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017. If that amount per member in that tax period exceeds Rs 7500, then entire amount is taxable.

The water charges collected separately on monthly basis is exempt from the levy of GST as per entry 99 of the Notification No. 2/2017 -Central Tax (Rate) dated 28th June, 2017. If the applicant collects water charges as a part of service provided without being shown separately on the basis of usage and sourcing it from both the contributions and endowment fund, then the same should be added to the total consideration of services and apportioned which determining the threshold for the purpose of taxing or exemption as per the entry No.77 of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017.

The amount collected from the member who is selling the site and ceases to be a member, as endowment fund is liable to tax under GST.

Entry No.77 of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017 is applicable to the applicant only to the extent of Rs 7500 per month per member collected 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.

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