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July 22, 2020

GST is leviable on full amount of contribution received from members when it exceeds Rs. 7500

by Rubina Dsouza in GST, GST Circular Notification

GST is leviable on full amount of contribution received from members when it exceeds Rs. 7500

Introduction

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. GST has been structured in a way that essential services and food items are placed in the lower tax brackets, while luxury services and products have been placed in the higher tax bracket. The GST council has fitted over 1300 goods and 500 services under four tax slabs broadly of 5%, 12%, 18% and 28% under GST. Certain supplies which 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)

Provision of Law

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:-

a. as a trade union

b. for the provision of carrying out any activity which is exempt from the levy of Goods and service Tax; or

c. 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 contributions received by an association from its members are liable to tax only in excess of the amount of Rs.7500 per month per member or is the entire amount of contribution taxable in case it exceeds Rs 7500 per month per member?

 A similar issue was raised before the Karnataka AAAR by M/s Vaishnavi Splendour Homeowners Welfare Associations.

Brief Facts of the case:

  1. The appellant is an association of apartment owners in the condominium known as “Vaishnavi Splendour”.
  2. The association has 88 members and each of them contribute towards the maintenance of common areas/ facilities, lightings in the common areas, water, etc. The contribution of each member is more than Rs.7500 per month.

Advance Ruling was sought for the following:-

  1. Whether the applicant is liable to pay CGST and SGST on the amount of contribution received from its members?
  2. If yes, whether it can avail the benefit of Notification No 12/2017 CT(R) dt 28.06.2017 (Sl.No 77) read with Notification No 02/2018 dt 25.01.2018 which provides exemption from tax, the value of supply upto an amount of Rs 7500 per month per member?
  3. If the answer to the above question is ‘yes’, whether it is required to restrict its claim of input tax credit?
  4. Whether the applicant is liable to pay CGST/SGST on amounts which it collects from its members for setting up a corpus fund?

Ruling passed by AAR Karnataka

  1. The applicant is liable to pay CGST and SGST on the contribution received from its members as their activities amounts to taxable supply of service.
  2. The benefit of exemption under entry No 77 of Notification No 12/2017 Central Tax (Rate) dated 28.06.2017 (as amended by Notification No 02/2018 dt 25.01.2018), is available to the applicant only if maintenance charges (contributions) do not exceed Rs 7500 per month per member. In case the charges exceed Rs 7500/-per month per member, the entire amount is Taxable.
  3. The applicant is eligible to claim ITC on the inward supplies of goods and services and this is subject to the restrictions as enumerated in Section 17(2) of the CGST Act read with Rule 42 of the CGST Rules and other restrictions applicable if any.
  4. The applicant is not liable to pay CGST/SGST on amounts which it collects from its members for setting up a corpus fund.
  5. Aggrieved by the ruling of the Authority on the issues of the first 2 points as above, the appellant has filed an appeal with the Appellate Authority of Advance Ruling (AAAR).

Issues to be addressed by the AAAR

There were 2 issues to be decided by the AAAR:

  1. Whether the activities of the association of apartment owners are liable to tax under GST as a supply?
  2. If so, whether in terms of entry No.77 of the 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, the contribution received by the association from its members are liable to tax only in excess of the amount of Rs.7500 per month per member.

Observations of AAAR regarding the taxability of the activities of the association of apartment owners

1.In a residential complex, a monthly contribution is collected from the owners of the apartment in the complex and the same is used by the association for making payments to the third parties for providing security service for the residential complex, maintenance or upkeep of common area and common facilities like lift, water sump, health and fitness centre, swimming pool, payment of electricity bill for the common area and lift, etc.

2. Association is made up of members who are homeowners in the residential complex and the activities mentioned above are performed by the Association for the maintenance and upkeep of the residential complex.

3. Under the GST regime, the taxable event which attracts the levy of GST is the ‘supply’ of goods or services.

4. Under the GST law, the word ‘supply’ has not been defined but rather the scope of what constitutes ‘supply’ is stated in Section 7 of the CGST Act.

5. According to Section 7 ” supply” includes

a. all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;

b. import of services for a consideration whether or not in the course or furtherance of business; and

c. the activities specified in Schedule I, made or agreed to be made without a consideration;

6. Therefore, for an activity to qualify as “supply” in terms of Section 7 of the CGST Act, the following ingredients must be satisfied:-

a. There must be a supply of either ‘goods’ or ‘services’ or both;

b. The activity should be undertaken for a consideration

c. The activity should be in course or furtherance of business

7. Section 2(102) of the CGST Act defines “services” to mean anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged.

8. The word ‘anything’ used in the said definition does not necessarily imply that everything other than goods, money and securities, is a service. The contextual meaning of the term ‘anything’ is to be taken.

9. The meaning of service is to be taken from the recipient’s point of view and accordingly it can be said that any transaction which gives the recipient a benefit can be considered as a service.

10. In the present context, the activities performed by the Association for ensuring the maintenance and upkeep of the residential apartment complex by procuring the services and goods from third parties, benefits every member of the Association and hence it can be said that there is a service rendered by the Association to its members.

11. To be taxable under GST law, the service must be supplied in the course or furtherance of their business. The term ‘business’ is defined under Section 2(17) of the CGST Act. “Business” includes,-

a. any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit;

b. any activity or transaction in connection with or incidental or ancillary to subclause (a);

c. any activity or transaction in the nature of sub-clause (a), whether or not there is volume, frequency, continuity or regularity of such transaction;

d. supply or acquisition of goods including capital goods and services in connection with commencement or closure of business;

e. 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;

f. admission, for a consideration, of persons to any premises;

g. services supplied by a person as the holder of an office which has been accepted by him in the course or furtherance of his trade, profession or vocation;

h. services provided by a race club by way of totalisator or a licence to book maker in such club; and

i. any activity or transaction undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities

12. For this case, clause (e) of the said definition was relevant and it was clear from the said clause that the activity of providing facilities or benefits by an association to its members for a subscription is a business under GST law.

13. Hence the transactions between the association and its members are a service.

Observations of AAAR on whether the said service were been provided for a consideration?

1.Section 2(31) of the CGST Act states that ‘Consideration’ in relation to the supply of goods or services includes:

a. any payment made or to be made, whether in money or otherwise, in respect of in response to, or for the inducement of the supply of goods or services, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;

b. the monetary value of any act or forbearance, whether or not voluntary, in respect of, in response to, or for the inducement of, the supply of goods or services, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government:

2. In the instant case, the monthly contribution made by the members to the association was in return for receiving the services of the Association in ensuring the maintenance and upkeep of the residential complex.

3. The money collected by the Appellant from its members was used to procure services and goods from a third party and provide the benefits of such procured goods and services to the members of the association.

4. In terms of Section 2(d) of the Indian Contract Act, 1872, consideration needs to necessarily flow from one person to another.

5. Under GST, the term ‘person’ has been defined in Section 2(84) of the CGST Act, 2017, to include an ‘individual’ as well as an ‘association of persons or a body of individuals, whether incorporated or not, in India or outside India’.

6. Therefore, the individual apartment owners who were members of the Association were the beneficiaries and the contribution made by them was to be considered as consideration for the service received.

Reliance of the Appellant on Supreme Court’s decision dated 03-10-2019 in the case of State of West Bengal & Ors vs Calcutta Club Ltd

  1. The Appellant had strongly relied upon the Supreme Court’s decision dated 03-10-2019 in the case of State of West Bengal & Ors vs Calcutta Club Ltd wherein it was stated that supplies made to its members by the member associations, both incorporated as well as unincorporated, are governed by the principal of mutuality and therefore they cannot be charged to tax, be it as tax on sale of goods or as a tax on supply of service.
  2. AAAR found that the decision of the Supreme Court was rendered in the context of the provisions of the Finance Act, 1994.
  3. In the Finance Act, 1994, the taxable event in terms of Section 66B was on services ‘provided or agreed to be provided by one person to another’.
  4. Under GST, the taxable event is the “supply” of goods or services or both. ‘Supply’ has been explained in Section 7 of the CGST Act, 2017 to cover the activities stated therein made in the course or furtherance of business.
  5. Under GST law, the term ‘business’ has been specifically defined in Section 2(17) of the CGST Act to include provision by a club, association, society or any such body (for a subscription or any other consideration) of facilities or benefits to its members.
  6. Thus, there is a marked difference in the concept of the levy between the Finance Act and the CGST Act.
  7. In terms of the Finance Act, it was sufficient that a service was rendered by one person to another for a consideration in the taxable territory for the levy of service tax to be attracted.
  8. However, under GST, the supply of the service should necessarily be in the course of or furtherance of business and ‘business’ has been defined to include a club, association, society or any such body which provides facilities or benefits to its members for a subscription.
  9. The doctrine of mutuality was examined by the SC in the context of the Sales Tax law and was applied on all fours to service tax.
  10. The SC after going through the various legal provisions of the Finance Act from the introduction of service tax in 1994 till the shift in the system of taxation of services in July 2012 held that, there was no levy of service tax on members clubs in the incorporated form.
  11. AAAR was of the view that the ruling laid down by the Supreme Court in the case of Calcutta Club Ltd would not influence the determination of the taxable event of ‘supply’ under GST in this case.
  12. In view of the above, AAAR held that there is a supply of service by the Appellant to its members and the same is taxable under GST.

Whether exemption will be available under Notification No.12/2017- Central Tax (Rate) Dated 28-06-2017

  1. The next question was whether, in terms of entry No.77 of the 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 the contribution received by the association from its members was liable to tax only in excess of the amount of Rs.7500 per month per member?
  2. The contention of the Appellant is that contributions upto an amount of Rs 7500 per member per month are exempted from GST by virtue of the above entry and for contributions above Rs 7500 per member per month, the difference amount alone is liable to tax.
  3. This is not a correct interpretation of the Notification. The exemption as per the entry 77 is available only when a member’s contribution per month is upto an amount of Rs 7500.
  4. A member, who contributes an amount which is more than Rs 7500, will not be eligible for the exemption under entry No 77 and the entire contribution amount will be liable to be taxed.
  5. Supreme Court of India, in the case of Commissioner of Customs (Import) Mumbai Vs. M/s Dilip Kumar and Company and Ors (Civil Appeal No. 3327 OF 2007) has held that the benefit of ambiguity in exemption notification cannot be claimed by the subject/assessee and it must be interpreted in favour of the revenue/state.
  6. Exemption notifications are subject to strict interpretation. The Circular No. 109/28/2019-GST dated 22.07.2019 issued by the CBIC only clarified this position.
  7. The Appellant had argued that this Circular will apply only prospectively since it is oppressive in nature.
  8. This argument could not be held since the said Circular did not introduce any new levy by its clarifications. The position regarding the exemption from GST was always applicable only when the individual member’s contribution per month was within Rs 7500.
  9. The Circular dated 22.07.2019 only clarified this position and did not bring in any new levy. Hence the question of applying the Circular prospectively did not arise.

AAAR upheld the order passed by the Advance Ruling Authority and appeal filed by the appellant M/s. Vaishnavi Splendour Homeowners Welfare Association was dismissed. The applicant is liable to pay CGST and SGST on the contribution received from its members as their activities amounts to taxable supply of service. The benefit of exemption is available to the applicant only if maintenance charges (contributions) do not exceed Rs 7500 per month per member. In case the charges exceed Rs 7500/-per month per member, the entire amount is Taxable.

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