Querist: XXXXXXXXXXX

QUERY

1. Querist seeks our opinion on the rate of tax applicable to the following three devices which are meant to be supplied to the XXXXXX:

(i) Porcelain-clad Vacuum Circuit Breaker

(ii) Current Transformer

(iii) Control Relay Panel

2. We have been referred to the Tender Specification issued by XXXXX as well as a Purchase Order dated 30-6-2017 for the purposes of this opinion.

3. It is apparent from the Purchase Order that the three devices are to be supplied under a single lumpsum price. It is in this context that a particular query has been directed to us: Whether the supply of the three devices under the Purchase Order is a composite or a mixed supply. The question of rate of tax applicable to the supply is closely connected with this determination.

REPLY

4. Porcelain-clad Vacuum Circuit Breakers are individually classifiable under Customs Tariff Heading 8535, Control Relay Panels under Customs Tariff Heading 8537 and Current Transformers under Customs Tariff Heading 8504. Under the Notification No.1/2017-Integrated Tax (Rate) dated 28-6-2017, the description of goods and the GST rates corresponding to these Customs Tariff Headings is set out herein below:

Customs Tariff Heading Description of goods Rate of tax
8535 Electrical apparatus for switching or protecting electrical circuits, or for making connections to or in electrical circuits (for example, switches, fuses, lightning arresters, voltage limiters, surge suppressors, plugs and other connectors, junction boxes), for a voltage exceeding 1,000 volts 18%
8504 Transformers Industrial Electronics; Electrical Transformers; Static Converters (UPS) 18%
8537 Boards, panels, consoles, desks, cabinets and other bases, equipped with two or more apparatus of Heading 8535 or 8536, for electric control or the distribution of electricity, including those incorporating instruments or apparatus of chapter 90, and numerical control apparatus, other than switching apparatus of Heading 8517 28%

5. It is to be noted that the description of goods in the Customs Tariff Heading and the Notification No.1/2017-Integrated Tax (Rate) dated 28-6-2017 are identical. The GST Notification also calls for use of the rules of interpretation used under the Customs Tariff to be applied for purposes of classification of goods under the GST Notification.

6. In Crompton Greaves Ltd. v. CCE Aurangabad [1996 (87) ELT 414] a Special Bench of the Central Excise and Gold Appellate Tribunal had taken the view that a Porcelain-clad Vacuum Circuit Breaker and EHV SF 6 Gas Circuit Breakers which are inter-connected through wiring to a Control Panel are classifiable under Heading 8537. The Tribunal held that even if the circuit breakers and the control panels are installed at different places, as long as they are inter-connected by wiring the system falls within the words used in Heading 8537: “panels…equipped with two or more apparatus of Heading 8535 or 8536”. In short, even if the circuit breaker and the control panel were not mounted on the same panel, the goods as such were held as classifiable under Heading 8537. This decision was affirmed subsequently by the Supreme Court through Order dated 18-10-2001 in Civil Appeal No.12553 of 1996.

7. It is our considered view that this judgment, given under the Central Excise law, is not relevant under the GST regime. In the case at hand, the Porcelain-clad Vacuum Circuit Breaker and the Control Relay Panel are not inter-connected at the Querist’s end at the time of making of supply. They are sold as separate components without any wire connecting them. It is the customer which will do the wiring after the goods are delivered. When the customer or its agents or authorised contractors will carry out the inter-connection and wiring of the Porcelain-clad Vacuum Circuit Breaker and the Control Relay Panel, the Querist will be out of the picture as the supply will have ended with the delivery of the Porcelain-clad Vacuum Circuit Breaker and the Control Relay Panel without any inter-connection between them. As such, Heading 8537 will never come into play.

8. Even otherwise, the judgments under Central Excise and Customs should be applied carefully under the new GST regime. It is pertinent to note that these GST Tariff Notifications are delegated legislation and are subject to the rules relating to composite and mixed supplies in Section 8 of the Central Goods and Services Tax Act, 2017. The Central Goods and Services Tax Act is a Parliamentary statute which will prevail over all secondary legislation. Thus, if a product is classifiable under a particular heading due to the application of the classification rules contained in Section 8 of the Act, the Customs Tariff rules or the HSN rules or the Tariff Heading descriptions cannot be interpreted in such a way as to achieve a completely different result.

9. A “composite supply” is defined in Section 2(30) of the Central Goods and Services Tax Act, 2017 to mean:

(30) “Composite supply” means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply.

Illustration.— Where goods are packed and transported with insurance, the supply of goods, packing materials, transport and insurance is a composite supply and supply of goods is a principal supply.

10. The term “principal supply” is defined in Section 2(90) of the Central Goods and Services Act, 2017:

“(90) “Principal supply” means the supply of goods or services which constitutes the predominant element of a composite supply and to which any other supply forming part of that composite supply is ancillary.”

11. Thus, a composite supply envisages one principal supply and two or more ancillary supplies. The principal supply is the pre-dominant element of the composite supply. The principal supply and the ancillary supplies must be “naturally bundled” and must be supplied in conjunction with each other in the ordinary course of business.

12. The word “naturally bundled” means a bundle of supplies in which each element is connected naturally to each other. For example: Renting of furniture is naturally bundled with the renting of immovable property [Xilinx India Technology Services v. CCE 2016 (44) STR 129 (CESTAT-Hyderabad)]

13. A “mixed supply”, on the other hand, is defined in Section 2(74) of the Central Goods and Services Tax Act, 2017:

“(74) “Mixed supply” means two or more individual supplies of goods or services, or any combination thereof, made in conjunction with each other by a taxable person for a single price where such supply does not constitute a composite supply.

Illustration.— A supply of a package consisting of canned foods, sweets, chocolates, cakes, dry fruits, aerated drinks and fruit juices when supplied for a single price is a mixed supply. Each of these items can be supplied separately and is not dependent on any other. It shall not be a mixed supply if these items are supplied separately.”

14. Unlike a composite supply, the constituent elements of a mixed supply are not “naturally bundled”. These constituents are also not supplied with each other in the ordinary course of business. The illustration to Section 2(74) brings this out clearly: Fruit juices and chocolates have nothing to do with each other. A supply of chocolate is never seen as ancillary to a supply of fruit juice and vice versa. When such goods are artificially bundled together, that is supplied under a single price, a mixed supply takes place.

15. In this case, we have been informed that a Vacuum Circuit Breaker is almost always used with a Current Transformer and a Control Relay Panel. On enquiring with the Querist as to whether a Vacuum Circuit Breaker is ever used without a Current Transformer and a Control Relay Panel, we were told the same happens in very rare circumstances. Most importantly, a Vacuum Circuit Breaker is never used without a Current Transformer and a Control Relay Panel in a power distribution system, which is where the customer ultimately intends to install these devices.

16. A Vacuum Circuit Breaker is used only for protection of electrical circuits and it is essential that the same be used with a Current Transformer and a Control Relay Panel for achieving that purpose. It is clear that the supplies of the Vacuum Circuit Breaker, the Control Relay Panel and the Current Transformer are naturally bundled with each other and these supplies together constitute a composite supply. The pre-dominant element of this composite supply is the Vacuum Circuit Breaker, since it is the Vacuum Circuit Breaker which actually performs the electrical circuit protection work. The Current Transformer and the Control Relay Panel merely assist the Vacuum Circuit Breaker in its work.

17. Now, Section 8 of the Central Goods and Services Tax Act, 2017 contains the rules for classification of composite supplies:

“8. Tax liability on composite and mixed supplies

The tax liability on a composite or a mixed supply shall be determined in the following manner, namely:—

(a) a composite supply comprising two or more supplies, one of which is a principal supply, shall be treated as a supply of such principal supply; and

(b) a mixed supply comprising two or more supplies shall be treated as a supply of that particular supply which attracts the highest rate of tax.”

18. Since the Vacuum Circuit Breaker constitutes the principal supply, the entire composite supply will be treated as a supply of the Vacuum Circuit Breaker. As aforesaid, a Vacuum Circuit Breaker is classifiable under Heading 8535 and attracts 18% rate of tax. The entire composite supply will thus attract 18% rate of tax.

19. Lastly, the same result is reached even if the rules for composite and mixed supply are not invoked. We have already discussed in Para 7 that Heading 8537 is not relevant at all in this case due to the lack of inter-connection between the Porcelain-clad Vacuum Circuit Breaker and the Control Relay Panel before the time of completion of supply. The Querist informs me that the three devices sold in this case are nothing but components of a system which, after inter-connection and assembly, is known in the market as a commercially distinct product which goes by the name “switchgear”. These three components are used as switchgear in power distribution systems to protect electrical circuits. Customs Heading 8535 contains the following sub-heading:

8535 90 – Other

8535 90 30 – Other control and switchgears

20. Chapter Heading 8535 deals with “electrical apparatus” which is used for protecting electrical circuits. The word “apparatus” will include even devices sold separately in an unassembled and non-connected form, as long as they are capable of working together to form any of the “apparatus” or systems mentioned in the sub-headings. Note 4 to Section XVI of the Customs Tariff (containing Chapter 85) also brings out this principle:

“Where a machine (including a combination of machines) consists of individual components (whether separate or inter-connected by piping, by transmission devices, by electric cables or by other devices) intended to contribute together to a clearly defined function covered by one of the headings in Chapter 84 or Chapter 85, then the whole falls to be classified in the heading appropriate to that function.”

… (Emphasis Supplied)

21. The Tender Specifications also make a reference to these devices as “switchgear components”. The Porcelain-clad Vacuum Circuit Breaker, Control Relay Panel and the Current Transformer will therefore be classifiable under Heading 8535 as “switchgear” even if the rules for composite and mixed supply in Section 8 of the Central Goods and Services Tax Act, 2017 are completely ignored.

22. Therefore, we are of the firm view that the three devices – Porcelain-clad Vacuum Circuit Breaker, Current Transformer and Control Relay Panel – to be supplied to SPDCTL by Querist are classifiable under Heading 8535 and will attract 18% rate of GST.

GST – Job Work

Query

Service by way of job work in relation to textile processing house is covered under entry 13A of G.S.T. (Services) rate and is taxable @ 5% with full ITC.

In Mumbai, Bhiwandi, Dombivali and Ichhalkaranji there are various process houses doing this job of processing of textile fabrics and this service was exempted in BST and VAT era and it appears that now it will be taxable @ 5% with full ITC under entry 13A.

Till today there was no hard and fast rule for consignment of fabrics (Grey or processed) and dealers were maintaining the records as per their convenience.

Now it appears that some guidelines are issued for keeping the record which is as under.

It is said that the owner of fabrics while sending goods for processing shall charge 5% GST to the processors on the value of textile fabrics and the processors shall claim the same as input credit.

After completing the job of processing at the time of delivery of processed fabrics shall be again charge of 5% GST on the value of fabrics plus his process charges which are together shall be claimed as input credit by the textile traders.

I personally feel it is our intra state transfer of goods like sending goods to consignment agent for sale who collects the full tax and the same is exempted for intra state only. While sending the fabrics back the processor should charge 5% GST only on his process charges and claims input credit on the packing materials and processing materials like chemicals purchased. Similarly large manufactures are keeping their goods for sales in the godown of agents like Amazon who sells goods on on-line orders, can be liable for tax for supply to Amazon. Kindly help.

Reply

Under GST there are various changes as compared to earlier VAT era. Still various clarifications are coming. Meanwhile the position of given facts can be analyzed as under:

The job work is defined in section 2(68) of CGST Act as under:

“(68) “job work” means any treatment or process undertaken by a person on goods belonging to another registered person and the expression “job worker” shall be construed accordingly;”

Thus, if the goods for job work are supplied by registered person to job worker for processing, it will be job work.

The further procedures for job work are already section 143. The said section is as under:-

“143. (1) A registered person (hereafter in this section referred to as the “principal”) may under intimation and subject to such conditions as may be prescribed, send any inputs or capital goods, without payment of tax, to a job worker for job work and from there subsequently send to another job worker and likewise, and shall,––

(a) bring back inputs, after completion of job work or otherwise, or capital goods, other than moulds and dies, jigs and fixtures, or tools, within one year and three years, respectively, of their being sent out, to any of his place of business, without payment of tax;

(b) supply such inputs, after completion of job work or otherwise, or capital goods, other than moulds and dies, jigs and fixtures, or tools, within one year and three years, respectively, of their being sent out from the place of business of a job worker on payment of tax within India, or with or without payment of tax for export, as the case may be:

Provided that the principal shall not supply the goods from the place of business of a job worker in accordance with the provisions of this clause unless the said principal declares the place of business of the job worker as his additional place of business except in a case —

(i) where the job worker is registered under section 25; or

(ii) where the principal is engaged in the supply of such goods as may be notified by the Commissioner.

(2) The responsibility for keeping proper accounts for the inputs or capital goods shall lie with the principal.

(3) Where the inputs sent for job work are not received back by the principal after completion of job work or otherwise in accordance with the provisions of clause (a) of sub-section (1) or are not supplied from the place of business of the job worker in accordance with the provisions of clause (b) of sub-section (1) within a period of one year of their being sent out, it shall be deemed that such inputs had been supplied by the principal to the job worker on the day when the said inputs were sent out.

(4) Where the capital goods, other than moulds and dies, jigs and fixtures, or tools, sent for job work are not received back by the principal in accordance with the provisions of clause (a) of sub-section (1) or are not supplied from the place of business of the job worker in accordance with the provisions of clause (b) of sub-section (1) within a period of three years of their being sent out, it shall be deemed that such capital goods had been supplied by the principal to the job worker on the day when the said capital goods were sent out.

(5) Notwithstanding anything contained in sub-sections (1) and (2), any waste and scrap generated during the job work may be supplied by the job worker directly from his place of business on payment of tax, if such job worker is registered, or by the principal, if the job worker is not registered.

Explanation.–– For the purposes of job work, input includes intermediate goods arising from any treatment or process carried out on the inputs by the principal or the job worker.”

Thus, it is very clear under section 143(1) that goods supplied to job worker will not be liable to GST. Correspondingly, the return of processed goods will also not be liable to GST. However, the conditions are to be followed give in section.

Therefore, job worker should charge GST only on its processing charges.

Since there is no prohibition about ITC the job worker will be entitled to ITC on its inward supply.

So far transaction between principal and agent is concerned in entry (3) of Schedule I to definition of ‘supply’ under section 7 provides as under:

“3. Supply of goods-

a) by a principal to his agent where the agent undertakes to supply such goods on behalf of the principal; or

b) by an agent to his principal where the agent undertake to receive such goods on behalf of the principal.”

Therefore if principal supplies goods to agent for sale by him on its behalf then it will be deemed to be supply by principal to agent. From facts given in the query the position appears that Amazon is agent of supplier of goods. Therefore supplier of goods to Amazon GST will be required to be paid when supplier of goods delivers the goods to Amazon.

Query No. 1: (Fair Market Value of flat on surrender of tenancy right to be taken)

An old lady was residing at Malad in tenanted chawl having about 1000 sq. ft. area. After her death her daughter-in-law became successor and continued to live there.

Subsequently the building was re-developed and she was allotted two flats of 650 sq. ft. each in her name in exchange of surrender of tenancy right. Out of which one was sold by her at an handsome price.

Now the ITO wants to tax the whole sum as long term capital gain without allowing any deduction as purchase value or cost price plus index cost.

Kindly advice whether the AO is correct?

Answer

The Finance Act, 1994 has amended the provisions relating to capital gains for the purpose of taxing the capital gains arising from transfer of tenancy right. For this purpose, the amendment provides that the cost of acquisition of the tenancy right be taken at NIL.

From the facts, it is clear by surrendering the tenancy right, the lady got in exchange two flats. So on surrender of tenancy right the cost of tenancy right was Nil. But, here the consideration for surrender of tenancy right was in – kind i.e. by way of exchange of two flats. Therefore, the fair market value of the property exchanged to be ascertained in order to arrive at the figure of consideration as per the Bombay High Court in Baijunath Chaturbhuj v. CIT [31 ITR 643].

Out of the two flats received, the lady sold one flat at handsome price. So for purpose of calculation the capital gains the index cost of this sold flat has to be ascertained and deducted. The flat being long-term, the index cost has to be worked out on the basis of fair market value of the flat in exchange of tenancy right at the date of surrender. Therefore, the view of the AO is not correct.

Query No. 2 (Amount deposited in bank)

In the new ITR forms provision has been made to mention aggregate amounts deposited in the banks during November 9, 2016 to December 30, 2016:

1. Whether only deposits of specified bank notes (SBN) or all types of notes has to be mentioned?

2. Whether aggregate of deposits in all bank accounts or in a single bank account i.e. ₹ 2/- lakh and above.

Answer

In ITR, details of all bank accounts held in India at any time during the previous year (excluding dormant accounts) are to be given, wherein details in respect of cash deposited during November 9, 2016 to December 31, 2016 of aggregate cash deposits during the period ₹ 2/- lakh or more is required to be given.

Thus the details are not restricted to specified bank notes (SBN), but it covers all types of notes.

Further aggregate cash deposited during that period is to be given in all bank accounts.

Query No. 3: (Violation of principles of Natural Justice)

When a closely held company receives share application money with premium in A.Ys. 2009-10, 2010-11 & 2011-12, he files Form 2, confirmation, address, PAN, bank account details etc during the course of assessment. AO doubts the capacity of share applicants and adds back u/s. 68 based on statement recorded of accommodation entry provider to share applicants. Assessee company asked for a copy of statement recorded and cross examination of entry provider, which was not provided by the AO. Please also refer proviso to section 68. Is the assessment valid.

Answer

Assessment is not valid, as it violates the principles of natural justice. The Supreme Court in R. B. Shreeram Durga Prasad v. Settlement Commission [176 ITR 169] has held that the order made in violation of principles of natural justice is void and nullify.

The Supreme Court in CIT v. Lovely Exports (P) Ltd. [216 ITR 195] has held that if share application money is received by the assessee company from alleged bogus shareholders, whose names are given to Assessing Officer, then Department is free to proceed to reopen their individual assessments in accordance with law but this amount of share money cannot be regarded as undisclosed income under section 68 of the assessee–company.

Provisos to section 68 was inserted by the Finance Act, 2012 w.e.f. April 1, 2013 i.e. from assessment year 2013-14 and therefore the provisos are not applicable to earlier assessment years.

Query No. 4 (Chargeability of share application money)

Share application money which is taxed as Undisclosed in the hands of a private company can also be taxed as undisclosed income in the hands of applicants by issuing notice u/s. 148?.

Answer

The broad scheme of the Act is to charge all income to tax but only in the hands of the same person.

So share application money received by Private Limited Company has to be taxed in whose hands? The Supreme Court in CIT v. Steller Investment Ltd. [251 ITR 263] has given answer by stating that even if it be assumed that the subscribers to the increased capital are not genuine, under no circumstances could the amount of share capital be regarded as undisclosed income in the hands of the company.

Thereafter, the Supreme Court in CIT v. Lovely Exports (P) Ltd. [216 CTR 195] has held that, if share application money is received by assessee – company from alleged bogus shareholders, whose names are given to Assessing Officer, then Department is free to proceed to reopen their individual assessment in accordance with law but this amount of share money cannot be regarded as undisclosed income under section 68 of assessee-company.

However, from the facts, it is clear that it has been wrongly taxed in the hands of the company instead of in the hands of applicant shareholders. Therefore, Assessing Officer can tax undisclosed income in the hands of applicant shareholders by reopening the assessment as per law.

At this juncture, it is necessary to refer the judgement of the Supreme Court in ITO v. Ch. Atchaiah [218 ITR 239], wherein the Hon’ble Court has observed that “where a person is taxed wrongfully, he is no doubt entitled to be relieved in accordance with law but that is different matter altogether. The person lawfully liable to be taxed can claim no immunity because the Assessing Officer has taxed the said income in the hands of another person contrary to law”.

Query No. 5: (Rectification on cash transaction)

If an invoice of ₹ 5,00,000/- of jewellery is adjusted by exchange of old gold worth of ₹ 3,00,000/- and balance ₹ 2,00,000/- is paid off in cash is hit by section 269ST?

Answer

Section 269 ST is inserted by the Finance Act, 2017 w.e.f. April 1, 2017 i.e. effective from Assessment Year 2017-18.

The object for introducing this provision has been explained in the Memorandum Explaining the Provisions relating to Direct Taxes. The Memorandum states that in India, the quantum of domestic black money is huge which adversely affects the revenue of the Government creating resource crunch for its various welfare programmes. Black money is generally transacted in cash and large amount of unaccounted wealth is stored and used in form of cash.

In order to achieve the mission of the Government to move towards a less cash economy, to reduce generation and circulation of black money inserted section 269ST in the Act to provide that no person shall receive an amount of two lakh rupees or more –

a) In aggregate from a person in a day; or

b) In respect of single transaction; or

c) In respect of transactions relating to one event or occasion from a person

Otherwise than by an account payee cheque or an account payee bank draft or use of electronic clearing through a bank account.

Thus, from reading the fact it is clear that jewellery worth of ₹ 5,00,000/- is adjusted by exchange of old gold worth of ₹ 3,00,000/- and balance ₹ 2,00,000/- has been paid by cash. Thus the provisions of section 269ST are clearly applicable.

Note: Please send your queries relating to Direct, Indirect & International Taxation, Accounting & Auditing Standards and Company Law, FEMA etc., to AIFTP, having interest to the Members.

An entity or a person registered under the Societies Registration Act, 1860 or under Co-operative Societies Law or under any relevant law whether liable under the Goods & Services Tax law implemented from 1st July 2017 is an issue to be discussed and debated. The States levy SGST on the supply of goods and/or services and concurrently the Central Government levies CGST on intra-state (local/within the State) supplies. On inter-state supplies of goods and services, IGST is levied which is the sum total of SGST and CGST. The GST law and provisions are common throughout India, though CGST law is enacted by the Central Government and SGST laws are enacted separately by all the States and Union Territories. So in this article we are generally referring to the provisions under CGST Act.

The charging provisions of Section 9 of the CGST Act provide that GST shall be levied on intra-state supplies of goods and/or services subject to the provisions thereunder and in the manner as prescribed. Such tax shall be paid by the ‘taxableperson1’ who is liable to be registered or who is registered under GST law.

The definition of the term ‘person2’ includes an Association of Persons (AOP) or Body of Individuals (BOI), whether incorporated or not, in India or outside India, a Co-operative Society registered under any Co-operative Society Law or Society as defined under the Societies Registration Act, 1860. Thus, a society whether engaged in any business of manufacturing or trading of goods, engaged in rendering services by way of carrying on business or a
Co-operative Housing Society rendering services to its members or any other persons, are the persons covered under the GST law. When such persons supply goods or services they shall comply with the provisions of GST law as discussed hereunder.

The term ‘supply’ is not specifically defined under the GST law. However, the ‘scope of supply3’ is provided for u/s. 7 of the CGST Act in an inclusive manner. The dictionary meaning of ‘supply’ is to provide or furnish. As per GST law, supply includes all forms of supply, 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. The term ‘business4’ includes provision of the facilities or benefits, by a club, association, society, or any such body, to its members for a subscription or any other consideration. Thus, provision of any facility to members by the society is treated as business when any such supply is for a consideration/subscription.

Any sale of goods by the Society is a supply of goods. Any transfer of right in goods or transfer of right to use goods is a supply of services. Any lease, tenancy, easement or licence of land or building is also a supply of services as provided under Schedule II of the CGST Act. When Society charges rent for allowing use of its building/property for putting billboards/ advertisement or for permitting telecom towers or dish antenna, it is a case of supply of services. The society charging to members for providing various facilities or for use of club house or health club or for use of open ground/society hall/common premises is also the supply of services. Supply of food or any other article for human consumption or any drink (other than alcoholic liquor) for consideration, by way of or as a part of any service is treated as supply of service. Supply of goods by any unincorporated AOP or BOI to its members for consideration is also covered under said Schedule II. Different tax rates are notified for different goods/services which can be NIL or 5% or 12% or 18% or 28% on the amount of consideration charged.

GST is to be paid by the taxable person who is liable to be registered or who is registered under GST law. The supplier whose ‘aggregate turnover5’ in a financial year exceeds ₹ 20 Lakhs (for Special Category States said turnover limit is ₹ 10 Lakhs) is liable to be registered under the GST Act. The person who makes inter-state supply or who is required to pay tax under reverse charge basis or who is required to deduct TDS under the GST law is also liable to be registered under the GST law irrespective of extent of its turnover. In other words even if the aggregate turnover of such persons are not exceeding the prescribed limit, yet are liable for registration under GST law.

Under the GST law, tax is payable on outward supply i.e., on consideration received or receivable for the supply made of goods/services. Thus, generally the tax will be charged and recovered by the supplier who is registered under the GST law. The Government has power u/s. 9(3) of CGST Act to notify certain categories of goods or services, the tax on which shall be paid on Reverse Charge Basis (RCB) by the recipient instead of the supplier. Using the said power the Government has issued the Notification No. 13/2017-Central Tax (Rate)
dt. 28th June 2017 whereunder the services supplied by an advocate or a firm of advocates is liable to tax on RCB payable by recipient. Thus, when society engages an advocate for any services, then on the fees payable to advocate, GST is payable on RCB (@ 18%) by the society. Even the services received from Goods Transport Agency (GTA) is liable for RCB tax (@ 5%) payable by the recipient of services under the said notification. When the society is liable to pay tax under RCB u/s. 9(3), then it is liable for registration irrespective of its aggregate turnover on outward supply being lower than the turnover limit prescribed for registration.

The Central Government has issued Notification No. 12/2017-Central tax (Rate) dated 28th June, 2017 to grant GST exemptions for intra-state supply of certain specified services. Serial no. 77 of said notification, refers that (Service Tariff Heading 9995) services by a non-profit entity registered under any law, to its own members by way of reimbursement of charges or share of contribution up to an amount of ₹ 5,000/- 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, is wholly exempt from GST. If the society’s aggregate turnover is less than ₹ 20 lakhs in a financial year then it is not liable for registration even if the contribution per member per month exceeds ₹ 5,000/-. When the society is liable for registration due to tax payable on account of Reverse Charge basis u/s. 9(3) of CGST Act, then also the benefit of exemption of ₹ 5,000/- per member per month is available to the society.

Once the person is registered under the GST law, then section 9(4) of CGST Act provides that when the taxable goods/services are procured by a registered person from an unregistered supplier, then the tax is payable on RCB by the recipient who is a registered person. RCB is payable at the rate as applicable to the supply of said goods/services. Where the aggregate value of such supplies from any or all the suppliers, is up to ₹ 5,000/- in a day, then such intra-state supply is exempt from GST as per Notification No. 8/2017-Central Tax (Rate) dated 28th June, 2017. If such procurement in a day exceeds ₹ 5,000 /-, then GST is payable on RCB by the recipient.

The society incurs various expenses for taking services like security services, AMC for various equipments and facilities, professional fees paid to advocate/professionals, etc. on which GST is paid either to the registered supplier of such services or paid on reverse charge basis when services are obtained from unregistered suppliers. The society registered under the GST law, is eligible for Input Tax Credit (ITC) of said GST paid on procuring services. The Capital Goods (CG) purchased by society is also eligible for ITC. To be eligible for ITC the goods/services must be received and tax invoice for same must be there as prescribed. The accounts and records must be maintained and produced when asked by the concerned authorities. When the goods/services are procured to render the taxable output services, entire ITC is available. However, on output side when certain services are wholly exempt or non-taxable or nil rated and certain services are taxable, then on common inputs/input services/CG, the ITC is available proportionately in the ratio of taxable turnover to total turnover. On certain goods/services ITC is not available as per section 17 of the CGST Act. Like GST paid on passenger motor vehicles purchases, rent-a-cab, works contract services for construction of immovable property or goods/services used for construction of immovable property, is not available for ITC. Food & beverages and health care services is eligible for ITC only when such services are charged on outward side. When the procured goods are lost, stolen, destroyed, written off or disposed off by way of gift or free samples, then ITC is not available. Even where ITC is available but when the supplier does not deposit the tax collected or does not file the GST return, then the recipient is not eligible for ITC. Recipient shall pay the consideration including the tax to the supplier within 180 days else the eligible ITC is to be reversed and deferred till the payment is made. Society has to file the GST returns and comply with various provisions of the GST law.

Property tax is levied on the property/flat/unit held by members in the building of the society. It is levied directly on the individual unit/member but generally it is paid by the society collectively for all members. The said property tax is collected by the society from its members by way of reimbursement. CGST Rule 33 relating to value of supply of services in case of pure agent which provides that when the expenditure or cost (property tax in this case) is incurred by a supplier (society) as a pure agent of the recipient (members) of supply, then such charges shall be excluded from the value of supply while levying GST. Such property tax shall be collected on actual basis (exact amount of property tax for a particular flat/unit) indicating separately in the invoice raised by the society on members. In such a case GST is leviable on charges collected from members, but excluding such property tax amount. The said issue is clarified by Tax Research Unit of Department of Revenue, Ministry of Finance, Government of India vide FAQ-F No. 332/04/2017-TRU. The services rendered by the society to its members is not specified separately in the GST Tariff Notification No. 11/2017-Central Tax (Rate) dated 28th June, 2017, hence it will be covered a Residuary Entry Heading 9997 referred as ‘Other Miscellaneous Services including services nowhere else classified’ under which will be liable to tax at SGST @ 9% and CGST @ 9%, thus total GST @ 18%.

Sale of land or sale of building (except when it is under construction) is neither a supply of goods nor a supply of services as provided under Schedule III of the CGST Act, so it is not liable to GST.

When the society gives the development right to a developer/builder to demolish and reconstruct the building, then the developer gives the premises in newly constructed building, corpus fund and compensation for each member as an hardship allowance or towards cost of rent for occupying/staying at other premises till the construction is completed and possession of new unit is handed over to the member. In such case, it is arguable that the principle of mutuality applies between society and members hence, there cannot be a supply to oneself. Further, the society/members are not in business and hence the transaction is not in the course or furtherance of business, thus it is not a supply of goods or services as provided u/s. 7 of CGST Act. However, the contrary argument may be that the definition of the term ‘business4’ is inclusive in nature and covers wide range of activities. Any trade or commerce or adventure whether or not for a pecuniary benefit is a business. There is no necessity of volume, frequency, continuity or regularity of any transaction to be transaction in a business. Thus when society contracts with the developer it can be said as provision of benefit by the society to its members which is also included in the definition of the term business. Even the provisions relating to scope of supply u/s. 7 cover all forms of supply of goods or services, including barter and exchange. In such a case the society will be liable for GST on consideration for granting/permitting the developer to develop the land and construct the building over it. Here a further issue is who is liable to pay GST? Whether the society or its members? In fact the society is legal owner of the land and building whereas its members are beneficiary of the said land and building having common and undivided interest in the society. Thus society shall register under GST Act and comply with the law accordingly. By such compliance the GST can be passed on and collected by the society from the developer. The developer in turn can take its Input Tax Credit (ITC) against its GST liability on output side when he sells the units during construction phase, as per the ITC provisions under the GST law. When the society complies with the GST law, then again its members are individually not liable for same. The developer will be liable to pay GST on value of construction of flats/units to be allotted to existing members/occupants as the construction services is supplied against the development right which is received in kind. The taxable value shall be computed following valuation provisions under the GST law. If the society is not registered under the GST law and does not pay GST, then developer will have to consider paying GST on Reverse Charge Basis (RCB) as in the hands on registered recipient the supply is from unregistered person, as provided u/s. 9(4) of CGST Act. Here also the issue may arise that when a person is not in business, then it is not a supply as provided u/s. 7 of CGST Act, and hence such a supply cannot be treated as a supply from an unregistered supplier, so developer is not liable to GST on RCB, based on the clarification vide Press Release dt. 13th July, 2017 given by Ministry of Finance, Government of India in case of purchase of old jewellery/ornaments by a jeweller from an individual.

The GST law is new which is framed in bits and pieces, by authorities implementing different laws, merging various earlier levies viz., Excise, Additional Excise Duty, Service Tax, VAT, Entry Tax, Entertainment Tax, etc. The complexities of all earlier laws are now merged in a single law which may be further complex to apply to ever developing technology and varied transactions. This being an indirect tax law, where the taxes can be passed on and the input tax credit is available to the other person, then taking aggressive position while executing the transaction may result in fatal consequences in future.

The relevant important definitions/provisions are reproduced hereunder.

Definitions/Provisions under CGST Act

1. ‘taxable person’ u/s 2(107): Means a person who is registered or liable to be registered under section 22 or section 24;

2. ‘person’ u/s. 2(84): includes—

(a) an individual;

(b) a Hindu Undivided Family;

(c) a company;

(d) a firm;

(e) a Limited Liability Partnership;

(f) an association of persons or a body of individuals, whether incorporated or not, in India or outside India;

(g) any corporation established by or under any Central Act, State Act or Provincial Act or a Government company as defined in clause (45) of section 2

(h) any body corporate incorporated by or under the laws of a country outside India;

(i) a co-operative society registered under any law relating to co-operative societies;

(j) a local authority;

(k) Central Government or a State Government;

(l) society as defined under the Societies Registration Act, 1860;

(m) trust; and

(n) every artificial juridical person, not falling within any of the above;

3. ‘scope of supply’ u/s. 7(1): For the purposes of this Act, the expression “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…….;

4. ‘business’ u/s. 2(17): 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 sub-clause (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; ………………………

5. ‘aggregate turnover’ u/s. 2(6): 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), exempt supplies, exports of goods or services or both and inter-State supplies of persons having the same Permanent Account Number, to be computed on all India basis but excludes Central tax, State tax, Union territory tax, integrated tax and cess;

 

Educationists should build the capacities of the spirit of inquiry, creativity, entrepreneurial and moral leadership among students and become their role model.

— Dr. A. P. J. Abdul Kalam

One may start with a bit of history relating to Service Tax. Dr. Raja Chelliah Committee on tax reforms recommended the introduction of Service tax. Service tax had been first levied on three services [Insurer, Stock Broker and Telegraph Authority] at a rate of five per cent flat from 1st July 1994 till 13th May 2003. Then the rates of tax were stepped up, education cess was added to boost revenue.

2. The revenue from Service tax to the Central Government has shown a steady rise since its inception in 1994. The tax collections have grown substantially since 1994–95 i.e. from ₹ 410 crore to ₹ 132,518 crore in 2012–13. The total number of Taxable services increased from 3 in 1994 to 119 in 2012. In the last fiscal, (2016-17) the Service tax revenue was about
₹ 254,000 crore.

3. In the Service tax regime, prevalent during the period till 30th June 2012, Service tax was levied only on the specified categories of activities mentioned as “taxable services” in the Finance Act, 1994.

4. Effective 16th June, 2005 vide Notification No.15/2005-ST, dated 7th June 2005, a new category of taxable service was introduced vide Section 65(25a) of the Finance Act, 1994:

• “Club or Association” means providing services, facilities or advantages, for a subscription or any other amount, to its members, but does not include –

(i) any body established or constituted by or under any law for the time being in force; or (RWA/Housing Society)

(ii) any person or body of persons engaged in the activities of trade unions, promotion of agriculture, horticulture or animal husbandry; or

(iii) any person or body of persons engaged in any activity having objectives which are in the nature of public service and are of a charitable, religious or political nature; or

(iv) any person or body of persons associated with press or media.

• Section 65(105)(zzze) of the Finance Act, 1994, defined “Taxable Service” means any service provided or to be provided to its members, by any club or association in relation to provision of services, facilities or advantages for a subscription or any other amount.

• Thus, until 30th June 2012, the Co-operative Housing Societies were outside the Service tax net.

5. However, from 1st July 2012 the concept of taxation on services was changed from a ‘Selected service approach’ to a ‘Negative List regime’. This changed the taxation system of services from tax on some selected services to tax being levied on every service other than exempt services mentioned in the Negative List.

6. The Central Government had issued Notification [Notification No. 25/2012-S.T., dated 20-6-2012] effective 1st July 2012, granting exemption to the Co-operative Housing Societies under certain conditions: Entry 28 reads:

“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.

7. There were certain doubts and the Central Board of Excise & Customs, the Apex Administrative body, (CBEC) had clarified the position vide its Circular No. 175/1/2014-S.T., dated 10-1-2014:

Sl. No. Doubt Clarification
1. In a residential complex, monthly contribution collected

(i) from members is used by the RWA for the purpose of making payments to the third parties, in respect of commonly used services or goods [example: for providing security service for the residential complex, maintenance or upkeep of common area and common facilities like lift, water pump, health and fitness centre, swimming pool, payment of electricity bill for the common area and lift, etc.]. Is service tax leviable?

(ii) If the contribution of a member/s of a RWA exceeds five thousand rupees per month, how should the service tax liability be calculated?

Exemption at Sl. No. 28(c) in Notification No. 25/2012-S.T. is provided specifically with reference to service provided by an unincorporated body or a non-profit entity registered under any law for the time being in force such as RWAs, to its own members.

However, a monetary ceiling has been prescribed for this exemption,
calculated in the form of five thousand rupees per month per member contribution to the RWA, for sourcing of goods or services from third person for the common use of its members.

If per month per member contribution of any or some members of a RWA exceeds five thousand rupees, the entire contribution of such members whose per month contribution exceeds five thousand rupees would be ineligible for the exemption under the said notification. Service tax would then be leviable on the aggregate amount of monthly contribution of such members.

2. (i) Is threshold exemption under notification No. 33/2012-S.T. available to RWA?

(ii) Does ‘aggregate value’ for the purpose of threshold exemption, include the value of exempt service?

Threshold exemption available under Notification No. 33/2012-S.T. is applicable to a RWA, subject to conditions prescribed in the notification. Under this notification, taxable services of aggregate value not exceeding ten lakh rupees in any financial year is exempted from service tax. As per the definition of ‘aggregate value’ provided in Explanation B of the notification,

aggregate value does not include the value of services which are exempt from service tax.
3. If a RWA provides certain services such as payment of electricity or water bill issued by third person, in the name of its members, acting as a ‘pure agent’ of its members, is exclusion from value of taxable service available for the purposes of exemptions provided in Notification 33/2012-S.T. or 25/2012-S.T.? In Rule 5(2) of the Service Tax (Determination of Value) Rules, 2006, it is provided

that expenditure or costs incurred by a service provider as a pure agent of the recipient of service shall be excluded from the value of taxable service, subject to the conditions specified in the Rule.

For illustration, where the payment for an electricity bill raised by an electricity transmission or distribution utility in the name of the owner of an apartment in respect of electricity consumed thereon, is collected and paid by the RWA to the utility, without charging any commission or a consideration by any other name, the RWA is acting as a pure agent and hence exclusion from the value of taxable service would be available.
However, in the case of electricity bills issued in the name of RWA, in respect of electricity consumed for common use of lifts, motor pumps for water supply, lights in common area, etc., since there is no agent involved in these transactions, the exclusion from the value of taxable service would not be available.

4. Is CENVAT credit available to RWA for payment of service tax? RWA may avail cenvat credit and use the same for payment of Service tax, in accordance with the Cenvat Credit Rules.

Clarification by the Central Government

8. The aforesaid clarification given in January 2014 by the Central Government in the context of the Negative List regime of taxation of services, effective 1st July 2012, has been the basis of levy of Goods & Services Tax under the new GST regime effective 1st July 2017.

• It would be relevant to understand the role played by Resident Welfare Association or the Co-operative Housing Society as service providers to its members or shareholders, respectively, and the legal structure & status of these service providers under the law.

Resident Welfare Associations – [RWA]

9. In Delhi and several other cities in India, one will see that residential colonies are having a Resident Welfare Association for each colony and each block. For example, if one is staying at G-Block saket, it will be having an independent G-Block Resident Welfare Association (RWA). Resident Welfare Associations (RWAs) are typically registered under the Societies Registration Act, 1860; they are governed by constitutional documents such as a Memorandum of Association, which contains their objectives and functions. Being voluntary associations, made by residents, they don’t have any statutory powers and have powers restricted to the contribution of sums for maintenance, and are answerable for accounting thereof.

• Some activities & functions are:

(a) To take up the matter with the competent authorities for the common interest of the residents for providing or improving common facilities in the area like – park, drainage, roads, streetlights, scavenging, water and electricity supplies, banking, post office, bus service facilities, community hall, milk booth, health centre, rationing shop, mini-super bazaar, shopping facilities etc.

(b) To arrange and organise social and cultural functions from time-to-time.

(c) To approach the concerned authorities for redressal of grievances of the members of the society.

(d) To share information about the Government rules, policies, notifications amongst the members of the association.

Comparison: RWAs and Co-operative Housing Societies

10. In contrast to the powers of Co-operative Housing Societies, the powers of Resident Welfare Associations are very limited. There are no statutory powers as they are voluntary organisations created to manage residents’ interest. Co-operative housing societies have various powers such as:

(a) The power to give permission or refuse for transfer of a flat by a member.

(b) The power to expel a member.

Co-operative Housing Societies

11. While the formation of the Co-operative Societies, their registration procedures; Rules and bye-laws may differ from one State to another, the broad principles will be more or less similar in nature. Generally, a typical Housing Society will be a non-profit entity, but the activities may involve generation of some income which is shared by all on mutuality principle.

Co-operative Societies Act: Maharashtra State

12. Section 2(16) of the Maharashtra Co-operative Societies(MCS) Act, 1960 defines: “Housing Society” means a society, the object of which is to provide its members with open plots for housing, dwelling or flats; or if open plots, the dwelling houses or flats are already acquired, to provide its members common amenities and services.

• Rule 10 of the MCS Rules, 1961 classifies the housing societies into THREE categories:

(i) Tenant Ownership Housing Societies

(a) These are housing societies where land is held either on leasehold or freehold basis by societies and houses are owned or are to be owned by members.

(b) In such societies, the societies are the owners or lessees of land, plots are carved out and given on a long term lease to construct their dwelling houses thereon as per the terms of the lease deed.

(ii) Tenant Co-partnership Housing Societies

(a) These are societies which hold land on ownership or on lease and construct flats thereon which are allotted to members who occupy them.

(b) The societies, thus, hold both the land and buildings and its members are allottees therein having the right of occupancy which right is heritable, transferable by transfer of shares to other persons in accordance with the provisions of the Act.

(iii) OTHER HOUSING SOCIETIES

(a) These are house mortgage societies and house construction societies.

(b) House mortgage has the object of advancing loans to the members and to the societies on the security of land and houses.

(c) House construction deals in purchase and sale of constructed houses or dwellings to members or other societies.

Judicial Review

13. In Mulshanker Kunverji Gor and Ors. vs. Juvansinhji Shivubha Jadeja decided on 18th September, 1979, yhe Hon’ble Gujarat High Court has critically analysed the provisions of the Gujarat Co-operative Societies Act, 1961 (same as MCS Act, 1960, as adapted on formation of the Gujarat State on 1st May 1960) and succinctly stated the law in these words:

“5. We have no doubt in our minds that Section 42 of the Gujarat
Co-operative Societies Act, 1961, inter alia, exempts from compulsory registration instruments relating to shares in a society notwithstanding that the assets of such society consist wholly or in part of immovable property. …. It is necessary, therefore, to find out what an instrument of transfer relating to “shares in a society” conveys to the transferee. It has been argued that there are two types of
Co-operative Housing Societies. One type is called ‘tenant co-partnership society”, another is called “tenant ownership society”.

• A “tenant co-partnership society” is a society where the land is owned by the society and upon which houses are constructed by the society for the benefit of its members. It is the co-operative venture of all the members of a
co-operative housing society which brings into being the houses which the members in their turn may occupy. They are constructed out of its own assets and out of the moneys borrowed by it. The debt is discharged by the society by collecting periodical contributions from them in specified amounts. In such a society, it is the society in which the land and the buildings in the eye of law vest.

• It has been argued that in “tenant ownership society”, the land belongs to the society and the superstructure thereupon is constructed, not by the society out of its funds but, by the member out of his personal funds.

• In such a case, when by an instrument a member transfers his “shares in the society” to another person, he not only transfers his shares but also his right to occupy and enjoy the land belonging to the society and the super structure which he has constructed out of his personal funds and which belongs to him personally.

• The transfer of such a superstructure cannot be effected except under a registered conveyance because clause (a) of Section 42 does not exempt from compulsory registration the transfer of a member’s personal immovable property – not belonging to the society – to another……”

• This distinction is vital when considering concept of “pure agent” theory under the CGST Rules, 2017.

New Tax Regime

Goods and Services Tax (GST)

14. With a great fanfare the Central Government announced at the Parliament Hall in New Delhi on the mid-night of 30th June 2017 / 1st July 2017 that the dream project of having “One nation, One Tax”, i.e. Goods and Services Tax has actually dawned. The Honourable Prime Minister described it as “Good” and “Simple” Tax. At the first blush it does not look to be that simple, but time alone will judge the impact of it on the trade & industry, the people & the nation’s economy.

15. Broadly, the Central Goods and Services Tax Act, 2017 (CGST Act) defines various concepts & terminologies (definition section has 121 sub-sections): a few of them are new, but many others are borrowed from the erstwhile Taxation Laws like Excise Act, Central Sales Tax Act, Finance Act (for levying Service tax) and other laws like Entry Tax, prevailing as on 30th June 2017. The composite structure of GST laws includes allied laws like State/Integrated/Union Territory GST Acts and many Forms & Rules of procedure are in place for implementing the new Indirect Taxation System, which is in tune with the Theory of Value Added Taxation, evolved in 1950s & now adopted by about 160 out of nearly 193 countries World –over.

16. Now, one can turn to the statutory provisions in the context of its impact on the Resident Welfare Associations (RWA) and the Housing Co-operative Societies functioning under the State Acts.

• Important definitions from the CGST ACT,2017 are reproduced below:

Definitions. 2. — In this Act, unless the context otherwise requires, —

(5) “agent” means a person, including a factor, broker, commission agent, arhatia, del credere agent, an auctioneer or any other mercantile agent, by whatever name called, who carries on the business of supply or receipt of goods or services or both on behalf of another;

(6) “aggregate turnover” 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), exempt supplies, exports of goods or services or both and inter-State supplies of persons having the same Permanent Account Number, to be computed on all India basis but excludes Central tax, State tax, Union Territory tax, integrated tax and cess;

(17) “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;

(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.

(31) “consideration” in relation to the supply of goods or services or both 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 or both, 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, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government:

Provided that a deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply;

(52) “goods” means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply;

(84) “person” includes —

(a) an individual;

(b) a co-operative society registered under any law relating to co-operative societies;

(c) society as defined under the Societies Registration Act, 1860 (21 of 1860);

(93) “recipient” of supply of goods or services or both, means —

(a) where a consideration is payable for the supply of goods or services or both, the person who is liable to pay that consideration;

(b) xxxxx; and

(c) where no consideration is payable for the supply of a service, the person to whom the service is rendered,

and any reference to a person to whom a supply is made shall be construed as a reference to the recipient of the supply and shall include an agent acting as such on behalf of the recipient in relation to the goods or services or both supplied;

(102) “services” means 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;

(108) “taxable supply” means a supply of goods or services or both which is leviable to tax under this Act; (Section 9(1) of the Act: Levy & collection)

17. It would be manifestly clear from the above definitions in the Central Goods & Services Tax Act, 2017 that a Co-operative Housing Society is ‘a person’ carrying on ‘business’ of making provision for a subscription or any other consideration of the facilities or benefits to its members; and consequently comes under the GST–Net.

• However, under section 22(1) of CGST Act 2017, the supplier of services is not liable get registered or pay tax until he crosses the threshold limit of ₹ 20 lakhs:

• Section 22(1) reads:

22. Persons liable for registration. — (1) Every supplier shall be liable to be registered under this Act in the State or Union Territory, other than special category States, from where he makes a taxable supply of goods or services or both, if his aggregate turnover in a financial year exceeds twenty lakh rupees :

Provided that where such person makes taxable supplies of goods or services or both from any of the special category States, he shall be liable to be registered if his aggregate turnover in a financial year exceeds ten lakh rupees.”

18. Therefore, once the “aggregate turnover”, which includes value of taxable supplies, exempt supplies etc. then the person must get registered & pay taxes on all “taxable supplies”. Under the section, if the aggregate turnover is below ₹ 20 lakhs, then the person is outside the tax-net, even if the aggregate value contains some “taxable supplies”. So, even if, “per member per month amount exceeds ₹ 5,000”, but if the aggregate turnover is below ₹ 20 lakhs; then no GST is payable. Likewise, if the aggregate turnover is above ₹ 20 lakhs, but there is no “taxable supply”, that is, all members pay less than ₹ 5,000 per month, there is no tax liability.

19. A Housing Society is also entitled to take the benefit of Exemption notification [Notification No. 12/2017-Central Tax (Rate), dated 28-6-2017]; Entry 77 therein reads:

TABLE

Sl. No. Chapter, Section, Heading, Group or Service Code (Tariff) Description of Services Rate
(per cent)
Condition
77 Heading 9995 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 Services 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.

Nil Nil

20. A plain reading of this Exemption Entry 77, will show that the ceiling limit per member per month is ₹ 5,000, and if the amount exceeds even by say ₹ 100, then the entire amount of ₹ 5,100 becomes liable to be taxed @ 18%, rate of tax currently fixed.

• The Clarification as to what is to be included in this ceiling limit and what is to be excluded as given in January 2014 (supra) holds good under the GST Regime. This is evident from the recent Press Note dated 12 July, 2017, reproduced below:

Press Information Bureau – Government of India-Ministry of Finance 13–July-2017 15:48 IST

Services provided by the Housing Society, Resident Welfare Association (RWA) not to become expensive under GST

(i) There are some press reports that services provided by a Housing Society [Resident Welfare Association (RWA)] will become expensive under GST. These are completely unsubstantiated.

(ii) It may be mentioned that supply of service by RWA (unincorporated body or a registered non- profit entity) to its own members by way of reimbursement of charges or share of contribution up to an amount of five thousand rupees 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 from GST.

(iii) Further, if the aggregate turnover of such RWA is up to ₹ 20 Lakhs in a financial year, then such supplies would be exempted from GST even if charges per member are more than Rs. five thousand.

(iv) RWA shall be required to pay GST on monthly subscription/contribution charged from its members if such subscription is more than ₹ 5000 per member and the annual turnover of RWA by way of supplying of services and goods is also ₹ 20 lakhs or more.

(v) Under GST, the tax burden on RWAs will be lower for the reason that
they would now be entitled to ITC in respect of taxes 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.

(vi) ITC of Central Excise and VAT paid on goods and capital goods was not available in the pre-GST period and these were a cost to the RWA.

(vii) Thus, there is no change made to services provided by the Housing Society (RWA) to its members in the GST era.

Ambit & Scope of Exemption

21. From the above clarification it is clear that even if the monthly charges per member per month cross the limit of ₹ 5000, the RWA / Housing Society is not liable to pay GST unless the “aggregate turnover” as computed in terms of section 2(6) of the CGST exceeds ₹ 20,00,000 in a fiscal. Now, computation of the threshold is comparatively easy, the computation of “per member per month limit” is the real poser.

22. Tax experts, that is, tax professionals (Chartered Accountants or Advocates or other Practitioners) are not on the same page. Some argue that the Society makes payment of Property Taxes or Water Charges or Electricity Bills “on behalf of the members” and as such “acting as their Agent” or “pure agent”; and hence these amounts must be “excluded from the Monthly maintenance Bill” in the context of “exemption limit of ₹ 5000” under the Notification dated 28-06-2017. The other school of thought is that the concept of “pure agent” has limited application.

23. It is respectfully submitted that apart from the clarification of the Board (CBEC), on the basic principle of agency or pure agent theory embodied in Rule 33 of the Central Goods & Services Tax Rules, 2017, unless there is a legal liability on an individual Member to pay the Charges levied by a Municipal Body, or other Authority the question of RWA / CHS or someone “paying it to the Third Party on behalf of a Member” does not arise.

{CBEC Circular dated 10th January 2014, Sr. No. 3

“However, in the case of electricity bills issued in the name of RWA, in respect of electricity consumed for common use of lifts, motor pumps for water supply, lights in common area, etc., since there is no agent involved in these transactions, the exclusion from the value of taxable service would not be available.” }

For application of “agency theory” one must determine on whom the legal liability to pay the charge or amount rests.

In many Housing Societies, the Land & Building are both “owned” by the Society and therefore, the Property Card Register in Municipal Records will show the name of the Society as “owners”. Consequently, the primary legal liability to pay Property Tax / House Tax or water charges is on the owner; even though some Municipalities hold “the occupier” also liable to pay such amounts. In these cases, certainly, the Agency theory fails.

24. Now, the “pure agent” concept embodied in Rule 33 of the Central Goods & Services Tax Rules, 2017, (or erstwhile Rule 5(2) of the Service Tax (Determination of Value) Rules, 2006, prevailing prior to 30th June 2017) is entirely in the different context.

• A useful reference may be made to the Guidance Note:

Exemption for Service Tax if Society is working as pure agent

• The CBEC’s Education guide in para 7.11.8 clarifies that if Resident Welfare Association or any society is working as pure agent i.e. service is provided on actual reimbursement basis or without any mark-up for procuring any goods or services from a third person, then the amount collected by the association / society from its members may be excluded from the value of taxable service, in terms of Rule 5(2) of the Service Tax (Determination of Value) Rules, 2006. For instance, payment of electricity / water bill pertaining to individual member, municipal taxes paid by society on behalf of its members, etc. Charges collected by society towards common expenses such as electricity for common area, water bill for garden / swimming pool, club house, transfer fees etc. cannot be excluded from the value of taxable services, since in these cases, society is not acting as an agent but incurring these expenses for the members of the society.

25. Now, one may examine the ambit & scope of Rule 33:

CENTRAL GOODS & SERVICES TAX RULES, 2017

[Notification No. 3/2017-Central Tax, dated 19-6-2017 as amended]

RULE 33: Value of supply of services in case of pure agent. — Notwithstanding anything contained in the provisions of this Chapter, the expenditure or costs incurred by a supplier as a pure agent of the recipient of supply shall be excluded from the value of supply, if all the following conditions are satisfied, namely, –

(i) the supplier acts as a pure agent of the recipient of the supply, when he makes the payment to the third party on authorisation by such recipient;

(ii) the payment made by the pure agent on behalf of the recipient of supply has been separately indicated in the invoice issued by the pure agent to the recipient of service; and

(iii) the supplies procured by the pure agent from the third party as a pure agent of the recipient of supply are in addition to the services he supplies on his own account.

Explanation. — For the purposes of this rule, the expression “pure agent” means a person who –

(a) enters into a contractual agreement with the recipient of supply to act as his pure agent to incur expenditure or costs in the course of supply of goods or services or both;

(b) neither intends to hold nor holds any title to the goods or services or both so procured or supplied as pure agent of the recipient of supply;

(c) does not use for his own interest such goods or services so procured; and

(d) receives only the actual amount incurred to procure such goods or services in addition to the amount received for supply he provides on his own account.

Illustration. — Corporate services firm A is engaged to handle the legal work pertaining to the incorporation of Company B. Other than its service fees, A also recovers from B, registration fee and approval fee for the name of the company paid to the Registrar of Companies. The fees charged by the Registrar of Companies for the registration and approval of the name are compulsorily levied on B. A is merely acting as a pure agent in the payment of those fees. Therefore, A’s recovery of such expenses is a disbursement and not part of the value of supply made by A to B.

26. If one has to apply this concept of pure agent, the first thing missing in the case of Housing Societies is that there is no contract of service between the Society & the Member for rendering any service “in the course of which” the Society incurs “cost & expenditure”, and then as per Explanation, clause (d) receives only the actual amount incurred to procure such goods or services “in addition to the amount received for supply “he provides on his own account”.

With due respect, the “Pure Agency” concept does not hold good in the case of Monthly maintenance Bills rendered by the Society by way of “reimbursement of charges” or “share of contribution”.

In the context of the concept of Pure Agent, the Board (CBEC) has clarified the matter and it would be binding on the Department.

Pure Agent Concept in GST (Excerpts)

Directorate General of Taxpayer Services

CENTRAL BOARD OF EXCISE & CUSTOMS

www.cbec.gov.in

INTRODUCTION

The GST Act defines an “Agent” as a person including a factor, broker, commission agent, …., who carries on the business of supply or receipt of goods or services or both on behalf of another.

Who is a pure agent and why is a pure agent relevant under GST?

Broadly speaking, a pure agent is one who while making a supply to the recipient, also receives and incurs expenditure on some other supply on behalf of the recipient and claims reimbursement (as actual, without adding it to the value of his own supply) for such supplies from the recipient of the main supply.

• While the relationship between them (provider of service and recipient of service) in respect of the main service is on a principal-to-principal basis, the relationship between them in respect of other ancillary services is that of a pure agent.

Let’s understand the concept by taking an example:

A is an importer and B is a Customs Broker.

• “A” approaches “B” for customs clearance work in respect of an import consignment.

• The clearance of import consignment and delivery of the consignment to A would also require taking service of a transporter.

• So A, also authorises B, to incur expenditure on his behalf for procuring the services of a transporter and agrees to reimburse B for the transportation cost at actuals.

• In the given illustration, B is providing Customs Broker’s service to A,
which would be on a principal to principal basis.

• The ancillary service of transportation is procured by B on behalf of A as a pure agent and expenses incurred by B on transportation should not form part of value of Customs Broker service provided by B to A.

• This, in sum and substance is the relevance of the pure agent concept in GST.

Illustration

Suppose a Customs broker issues an invoice for reimbursement of a few expenses and for consideration towards agency service rendered to an importer.

The amounts charged by the Customs Broker are as below:

Sr. No. Component charged in invoice Amount
1. Agency Income ₹ 10,000/-
2. Travelling expenses; Hotel expenses ₹ 15,000/-
3. Customs Duty ₹ 5,000/-
4. Docks Dues ₹ 5,000/-

• In the above situation, agency income and travelling/ hotel expenses shall be added for determining the value of supply by the Customs broker whereas Docks dues and the Customs Duty shall not be added to the value, provided the conditions of pure agent are satisfied.

Prepared by: National Academy of Customs, Indirect Taxes & Narcotics

The aforesaid clarification, states that if a Service Provider “during the course of his rendering service” to the recipient (on principal to principal basis), also receives and incurs expenditure on some other ancillary supply on behalf of the recipient and claims reimbursement (as actual, without adding it to the value of his own supply) for such supplies from the recipient of the main supply, he is said to be acting as pure agent. The concept of pure agent theory has no application in the case of CHS as the Society is not, strictly speaking, in the business of providing services, though the service it provides is “treated” as falling under the definition of term “business”.

What is the Scope of Exemption under Entry 77?

27. The Entry, on analysis, reads:

(A) Service by a non-profit entity registered under any law for the time being in force,

(B) to its own members

(i) by way of reimbursement of charges or

(ii) share of contribution –

(a) up to an amount of five thousand rupees per month per member

(b) for sourcing of goods or services

(C) from a third person

(D) for the common use of its members (e) in a housing society or a residential complex.

28. It is a settled principle of law that the eligibility criteria laid down in an “exemption” provision in a statute or a rule or a notification has to be construed strictly, and when there is a doubt, construe it in favour of the State and not the tax-payer; but once it is found that the applicant is covered by the same, the exemption notification should be construed liberally. Secondly, the words and expressions defined in the Act have to be assigned the same meaning in the entire enactment unless the context requires otherwise. Similarly, the rules of English language/grammar have to be followed and the meaning ascribed in “common parlance understanding” of those who deal with the subject is to be adopted.

29. The terms of Exemption entry when re-phrased would read:

• Service provided by Housing Society to its members for procuring from third party goods/services for the common use of members by way of reimbursement of charges or share of contribution up to ₹ 5000 per month per member.

Now, the expression, services to Members by way of “reimbursement of charges” or “share of contribution”, has to be interpreted:

• Both are unidentical expressions.

• The term “charge” in legal connotation means: To impose a tax, duty.

• In the context, it would mean the tax or levy by Government or Local /Municipal or other Body.

• It follows that all levies on the Society, (be it Property Tax, Water tax or Non-Agricultural Assessment) which are “paid” by the Society, are being “reimbursed by Members”, through Monthly Maintenance Bills.

• Second expression, “share of contribution”, which would refer to the “expenditure” incurred by the Society for providing common benefits, facilities. e. g. sweeper, lift, water pump, common area lights, and other expenses made in terms of the Bye-laws.

• “Share of contribution” is also mentioned in the Bye-laws, e.g. Bye-law 69 (a) reads:

69. (a) The Committee shall apportion the Share of each member towards the charges of the Society on the following basis:

(i) Property taxes: As fixed by the Local Authority.

(ii) Water Charges: On the basis of total number and size of inlets provided in each flat.

(iii) Expenses on repairs and maintenance of the building/ buildings of the Society: At the rate fixed at the General Body from time-to-time, subject to the minimum of 0.75 per cent per annum of the construction cost of each flat for meeting expenses of normal recurring repairs.

(iv) Expenses on repairs and maintenance of the lift, including charges for running the lift: Equally by all the members of the building in which lift is provided, irrespective of the fact whether they use the lift or not.

30. Now, the term: “up to” an amount of ₹ 5,000. The expression “up to” is used to say that something is less than or equal to but not more than a stated value, number, or level: Therefore, if the Bill crosses the mark, the entire exemptions is lost.

31. Coming to different types of Funds envisaged by the Act, Rules and the Bye-laws, it is seen that the Society includes in its “monthly maintenance Bill”, stated amount towards the named Fund. This amount cannot be called “share of contribution”, because the amount is not “appropriated” against any specified expenditure incurred for sourcing goods or services, but is a provision for future. Let us take illustration:

e.g. SINKING FUND

Sinking fund, noun: sinking fund; plural noun: sinking funds

1. a fund formed by periodically setting aside money for the gradual repayment of a debt or replacement of a wasting asset.

• So although one may “contribute” or “share” as “a member”, the “amount”, specified in the bill, the Society which received it, has not earmarked it for a “particular supply of goods or services”. It will be retained as “deposit” for future “expenditure” for procuring supply from the third parties. Therefore, it is not a “consideration”, for any service provided by the Society. In the definition of the term consideration in section 2(31), a proviso is there:

Provided that “a deposit” given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply;

• So, in presenti, the amount billed /paid towards ‘sinking fund’ cannot be treated “as contribution” for sourcing supply of goods or services for the benefit of members. However, when the fund is utilised, yes, taxability may arise subject to threshold etc.

When the Amount Paid By the Member (a) Exceeds Exemption or (b) Retained by the Society.

32. It has been clarified by the Board, that if the amount collected from each Member per month exceeds the threshold of ₹ 5,000 even by say ₹ 100, then the Value of taxable supply is NOT just ₹ 100, but the entire amount of ₹ 5,100.

• The next question is how one must treat the amounts Billed or included in the Monthly Maintenance Charges, which are not collected by the Society for defraying it to the Third Parties for the sourcing of goods & services for the common use by the Members. In other words, the amounts collected are retained as such by the Society itself for eventually sharing it on mutuality principle.

For example: Parking Charges are a sort of rent for user of the open common area and that amount is collected from those who keep their four-wheelers, with the permission of the Society, in the open area in the Society compound, and such amount is not paid over to anyone, but is retained with the Society itself.

• What are the other services for which society collects amounts from members, who are the beneficiaries, and retains such amounts as its own:

1. Late payment fees

2. Parking charges

3. Rebates received from outsider for specific class conducted in society

4. Non occupancy fees

5. Guest room booking

6. Club house booking

7. Any other receipts

8. Transfer Fee

9. Admission Fee

10. NOC Charges

33. In the light of the above discussion, a ready to use Table is prepared indicating which items are to be included in the ceiling limit of rupees five thousand:

Monthly Co-op. Housing Society Bill

Maintenance charges & other components of Bill

Sr. No. By way of “reimbursement of charges” or “share of contribution” Applicability Whether includable in ₹ 5,000: Y or N
1. Service charges (housekeeping, security, electricity for common areas, equipment, sweeper) Equally divided among the flats Y
2. Expenses on repair and maintenance of elevators Equally divided among the flats Y
3. Non-occupancy charges For flats which are rented, calculated at 10% of service charges N
4. Use of Open space, Terrace, community Hall As decided by the General Body N
5. Entrance Fee, Share Transfer Fee and premium As per Bye-law: ₹ 100, ₹ 25,000 & as decided by the General Body (but within limits as Govt. Resolution), respectively N
6. Water charges Actual consumption of each flat, or number of water inlets Y
7. Property tax: Co-partner Actual as determined by BMC Y
8. Ownership Society Bill on Member, Society may act as an agent N
9. Insurance Premium As per General Body Y
10. Non-Agri. Assessment At the rate fixed under MLRC,1966 Y
11. Creation of the Repairs and Maintenance Fund 0.75% per annum of the construction cost of each flat N
12. Sinking fund Minimum of 0.25% per annum of the construction cost of each flat N
13. Major repairs fund As decided by the General Body N

34. In conclusion, it can be said that for the Services rendered by the Society the amounts paid by the Members by way of reimbursement of charges/share of contribution, fall under three categories:

(a) Amounts includible in the ceiling limit of ₹ 5000, and as such exempt,

(b) Amounts excludible from the ceiling limit of ₹ 5000 as being in the nature of “Deposits”, like contribution towards Funds, and liable to be taxed, when “appropriated” against any supply of goods/ services, subject to exemption/s,

(c) Amounts ineligible for Exemption, as being retained by the Society, and hence liable to taxation under GST Law.

35. Once the Housing Society crosses the Exemption limit and the aggregate value exceeds the threshold of ₹ 20 lakhs, the Society is obliged to obtain Registration, pay GST, file periodical Returns and comply with all the procedures and formalities under the law, by taking requisite assistance from the tax experts, if need be.

36. As would be evident from the analysis of the legal provisions of the GST law, clarifications of the Board (CBEC) that there are many arguable issues, and the last word can be said by the Board (CBEC) or the Courts of law. Till then keep your fingers crossed.

• Until that time, the views expressed in this analytical note may serve as a useful guide to arrange the affairs of the Housing Society so as to be within the framework of new dispensation under the Good & Simple Tax regime, called GST Regime.