GST ON CO-OPERATIVE HOUSING SOCIETIES

Introduction

A co-operative housing
society is a mutual association wherein the membership is restricted to the
buyers of the flats situated in the said building. The society is managed by a
Managing Committee elected by the Members at the General Body Meeting of the
Society from amongst its members only. The primary role of the Managing
Committee is to manage, maintain and administer the property of the society.
This would include making payments to the municipal / local authorities for the
property tax, water charges, etc., arranging for various facility for the
members, such as security, lift (operation and maintenance), maintaining the
common area and facilities of the society (gymnasium, swimming pool, play or
garden area, etc.). For undertaking the above activities, the society needs
funds, which are collected from its members periodically in the form of
maintenance charges. We shall discuss in this article the levy of GST on such
maintenance charges.

At the outset, it is
important to note that the levy of taxes on the co-operative housing societies,
both under the income tax as well as the service tax regime has seen its fair
share of litigation and therefore, taking precedents from the said laws, we
shall discuss the alternate interpretations for different issues.

GST – Levy provisions

In order to determine
whether GST is leviable or not, reference to the charging section (section 9 of
the CGST Act, 2017) becomes necessary which provides that the tax shall be
levied on all supplies (intrastate or interstate) of goods or services
on the value to be determined u/s. 15 of the CGST Act, 2017 and the said
tax shall be paid by the taxable person.

From the above, it is
evident that the primary requirement for the levy of tax to succeed under GST
is that there should be a supply. While the term “supply” has not been defined
under the GST law, its scope has been explained u/s. 7. Clause (a) of section 7
(1) thereof is relevant which provides that 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;

Therefore, to treat a
transaction as supply the following three parameters are important:

–    Supply of goods or supply of services

–    Supply in the course or furtherance of business

–    Supply for a consideration

Can a Co-operative housing
society be said to be engaged in supplying services?

While the activities
undertaken by a co-operative housing society for its members cannot be treated
as supply of goods, the question that needs consideration is whether the same
can be considered as supply of service or not? The term service has been defined
u/s. 2 of the Act to primarily mean anything other than goods and therefore, a
simple answer to this would be that the activities undertaken by a co-operative
housing society is a supply of service to its members.

However, an alternate view
is also possible. It would be important to note that the activities undertaken
by the society for its members come within the ambit of principle of mutuality
which says that a person cannot earn out of himself and a person cannot supply
to one self. Infact, applying the said principle, in the context of Income Tax,
receipts by a co-operative housing society from its members have been held as
not being income. Some of the important decisions in this regard are:

–    Chelmsford Club vs. Commissioner of
Income Tax — 2000 (243) ITR 89 (SC)

–    Commissioner of Income Tax vs. National
Sports Club of India — 1998 (230) ITR 373 (Del)

–    Commissioner of Income Tax vs. Bankipur
Club Ltd — 1997 (22G) HR 97 (SC)

–    Commissioner of Income Tax vs. Delhi
Gymkhana Club Ltd. — 1905 (155) ITR 373 (Del)

–    Commissioner of Income Tax vs. Merchant
Navy Club — 1974 (96) ITR 2GI (AP)

–    Commissioner of Income Tax vs. Smt.
Godavaridevi Saraf — 1978 (2) E.L.T. (J624) (Bom.)

In fact, relying on the
above set of decisions, in the context of service tax, it has been held on
multiple occasions that services provided by a co-operative housing society /
club to its members come within the purview of principle of mutuality and
hence, not liable to service tax. Notable decision in this regard is in the case
of Ranchi Club Ltd. vs. Chief Commissioner [2012 (26) S.T.R. 401 (Jhar.)] wherein
it was held as under:

18. However, learned counsel for the petitioner
submits that sale and service are different. It is true that sale and service
are two different and distinct transaction. The sale entails transfer of
property whereas in service, there is no transfer of property. However, the
basic feature common in both transaction requires existence of the two parties;
in the matter of sale, the seller and buyer, and in the matter of service,
service provider and service receiver. Since the issue whether there are two
persons or two legal entity in the activities of the members’ club has been
already considered and decided by the Hon’ble Supreme Court as well as by the Full
Bench of this Court in the cases referred above, therefore, this issue is no
more res integra and issue is to be answered in favour of the writ petitioner
and it can be held that in view of the mutuality and in view of the
activities of the club, if club provides any service to its members may be in
any form including as mandap keeper, then it is not a service by one to another
in the light of the decisions referred above as foundational facts of existence
of two legal entities in such transaction is missing. However, so
far as services by the club to other than members, learned counsel for the
petitioner submitted that they are paying the tax.

Similar view has been held
in other cases as well.

–    Sports Club of Gujarat Ltd. vs. Union of
India [2013 (31) S.T.R. 645 (Guj.)]

–    Karnavati Club Limited vs. Union of India
[2010 (20) STR 169 (Guj.)]

–    Breach Candy Swimming Bath Trust vs. CCE,
Mumbai [2007 (5) STR 146 (Mumbai Tribunal)]

–    Matunga Gymkhana vs. CST, Mumbai [2015
(38) STR 407 (Mumbai Tribunal)]

–    Cricket Club of India Limited vs. CST,
Mumbai [2015 (40) STR 973 (Mumbai Tribunal)]

To summarise, in view of
the above judicial precedents, an important proposition that emerges is that
vis-à-vis the supplies to the members, the principle of mutuality continues to
apply even under the GST regime and therefore, any collection from members
continue to be outside the ambit of levy of tax. Therefore, GST shall apply
only in case of services provided to non-members.

However, all the above
decisions are contested by the Department and the matter is pending before the
Supreme Court.

Further aspect to be
examined is whether the said decisions rendered in the context of service tax
would have relevance under the GST Regime. It is felt that the concept of
mutuality not only continues under GST Regime but becomes even more fortified
due to the following reasons:

1.  Under the service tax regime, Explanation 3 to
section 65B(44) provided a deeming fiction treating an unincorporated
association and the members thereof as distinct persons. While it was possible
to argue that a co-operative society is an incorporated association and hence
the said deeming fiction is not applicable, the said Explanation did somewhere
indicate the intention of the Legislature. In contradistinction, the GST Law
nowhere has such a deeming fiction. It may also be important to note that such
deeming fiction is created in case of establishments in distinct States or
countries.

2.  Entry 7 of Schedule II treats supply of goods
by any unincorporated association or body of persons to a member thereof as a
supply of goods but does not specifically cover services under the ambit
thereof.

Can a co-operative housing
society be said to be providing services in the course or furtherance of
business?

The second aspect that
needs consideration is whether a co-operative housing society is carrying out
its activities in the course or furtherance of business or not? This becomes
essential since in the absence of the same, the service may not get
classifiable u/s. 7 to be covered within the scope of supply itself and hence,
may not attract GST at all (irrespective of position taken in the first case).

In order to determine
whether a co-operative housing society carries out its activities in the course
or furtherance of business or not, it becomes essential to refer to the
definition of business as provided for u/s. 2 (17) of the CGST Act, 2017, which
is reproduced below for ready reference:

(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;

(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;

(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;

At this juncture, it is
relevant to note that the above definition is similar to the definition
applicable under the CST Act, 1956 (prior to amendment doing away with the
for-profit clause). In the context of the said definition, the Supreme Court
had in the case of State of Andhra Pradesh vs. Abdul Bakhi & Bros
[(1964) 15 STC 644 (SC)] held that the expression “business” though
extensively used as a word of indefinite import, in taxing statutes it is used
in the sense of an occupation, or profession which occupies the time, attention
and labor of a person, normally with the object of making profit. To regard an
activity as business there must be a course of dealings, either actually
continued or contemplated to be continued with a profit motive, and not for
sport or pleasure. Keeping the said principles in mind (except for the clause
relating to pecuniary benefit), let us analyse as to whether the activities of
a co-operative housing society can be classified as trade, commerce,
manufacture, profession, vocation, adventure, wager or any other similar
activity or not?

To do so, let us first
understand the activities of a co-operative housing society. As discussed
earlier, the main object of incorporating a co-operative housing society is to
manage, maintain and administer the property of the society and thus protecting
the rights of the members of the society thereof. There is no apparent
intention to carry out any of the activities specified in clause (a) which a
co-operative housing society carries out. That being the case, the question of
activities of the co-operative housing society being classifiable as business
under clauses (a) to (c) of the above definition does not arise at all.

The only other clause,
which appears remotely relevant to the current topic of discussion is clause
(e) which is reproduced below

(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.

Let us first understand
the concept of how the co-operative housing society model functions. A builder
develops land by constructing the building and other amenities, sells it to
potential buyers who after the completion of construction and handover of
possession, form a society to manage, maintain and administer the property. The
society incurs expense of two kind, one being directly incurred for the member
(such as property tax, water bill, etc.) and second being common expenses for
all the members (such as lighting of common area, lift operation and
maintenance, security, etc.) which are recovered from the members. However,
what is of utmost importance is that a member does not come to society for
enjoying the said facilities, but to stay there, which continues to be his
right by way of ownership which cannot be denied to him. Even if there is a
case where a member stops contributing to the expenses, other members of the
society cannot deny the access to the member to his unit, though the facilities
extended may be discontinued.

However, it is not so in
the case of a club or association. A person becomes a member only to enjoy the
facilities that the said club or association has to offer. If that be the case,
it can be argued the term “society” used in clause (e) of section 2 (17) is to be
read in context of the surrounding words like club or association and hence,
has to be restricted only to such societies where the purpose of obtaining
membership is to receive benefits/ facilities.

If a conservative view is
taken that the activities undertaken by a co-operative housing society is
classifiable as supply of services in the course or furtherance of business, is
the supply for a consideration?

Section 9 of the CGST Act,
2017 provides that tax shall be levied on the value of supply, as determined
u/s 15 of the CGST Act, 2017. Section 15 (1) provides that where the supplier
and recipient are related and price is the sole consideration for the supply,
the value of supply shall be the transaction value, i.e., the price actually
paid or payable for the said supply of goods or services or both.

Therefore, following
points need analysis, namely:

–    Whether the society and member can be
treated as related person or not?

–    Is the price sole consideration for the
supply?

To
answer the first question, i.e., whether the society and member are related
person or not, it becomes necessary to refer to understand the scope of
“related person”. Explanation 1 to section 15 provides that

(a) persons
shall be deemed to be “related persons” if —

(i)     such persons are officers or directors of
one another’s businesses;

(ii) such
persons are legally recognised partners in business;

(iii) such
persons are employer and employee;

(iv) any
person directly or indirectly owns, controls or holds twenty-five per cent. or
more of the outstanding voting stock or shares of both of them;

(v)    one of them directly or indirectly controls
the other;

(vi)   both of them are directly or indirectly
controlled by a third person;

(vii)  together they directly or indirectly control a
third person; or;

(viii) they are members of the same family;

From the above, it is more
that evident that society and members cannot be classified as related persons
since it is not classifiable under either of the above entries.

Regarding the second point
also, it is more than evident that price is the sole consideration of the
supply. This is because the society does not recover anything over and above
the amounts charged for undertaking the maintenance activity.

That being the case, the
value of supply will have to be determined as per section 15 (1) of the CGST
Act, 2017, i.e., GST shall be attracted on the transaction value.

Charges not to be included
in the taxable value

A co-operative housing
society recovers various charges from its members, such as property tax, water
tax, water charges, NA Tax, electricity charges, contribution to sinking fund
and repairs and maintenance fund, car parking charges, non-occupancy charges,
interest on late payment, etc.

A detailed clarification
on the taxability of the above charges has been issued and the same is
tabulated below for ready reference, along with remarks wherever applicable:

*The clarification
talks about only water tax. However, most of the local authority do not charge
tax but charge a fee based on usage by the member. However, this aspect may
also not have any impact on the taxability since the water charges are levied
basis the consumption per flat and hence, even if the society recovers the said
expense from members, the same will have to be excluded from the value of
taxable service in view of Rule 33 of the CGST Rules, 2017.

** In most of the
cases, electricity charges are not recovered by the municipal / local authority
but by the private players like Reliance Energy, Tata Power, BEST, etc. To the
extent the electricity charges pertain to the members’ flat, the same is
recovered directly by the service provider from the member. The society may
recover only the electricity charges relating to common area, on which the
claim of non-taxability may not be possible.

*** While the
Government clarification states that tax is applicable on such recoveries, it
can be claimed that the contribution to the said funds is not liable to GST for
the following reasons:

1.  Both the funds are statutory requirement under
the bye-laws of the society

2.  These funds are meant for specific use which
might happen in distinct future

3.  This are in the nature of deposits given by
members to safeguard future expenditure. Deposits by themselves are not liable
for GST.

Basis these three
propositions, a view can be taken that collection of sinking fund / repair
funds are not taxable, irrespective of the clarification issued.

****Share transfer fees
is the fees collected from an incoming member for transfer of ownership from
old member to new member. The issue that arises is that the definition of
business u/s. 2 (17) provides that provision of facilities / benefits by a
society to its’ members shall be treated as business. However, at the time when
the share transfer fees are collected from the incoming member, he is not
actually a member of the society. Only upon completion of the share transfer process
does a person become member of the society. Therefore, share transfer fees
recovered from such incoming members cannot be considered as business under
clause (e) of section 2 (17). In view of the earlier discussion, since the
activities of a co-operative housing society are not covered under any of the
other clauses of section 2 (17), collection of share transfer fees may not be
classifiable as being in the course or furtherance of business and hence, a
view can be taken that the share transfer fees are not liable to tax,
irrespective of the clarification issued.

Exemption for Co-operative Housing Societies

Notification 12 / 2017 –
Central Tax (Rate) dated 28.06.2017 provides an exemption for services 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 up to an amount of Rs. 7500[1]  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.

Important observations
from the above exemption entries are:

– The monetary limit will
not include the amounts recovered which are not taxable in view of the society.

– The exemption will have
to be decided qua the member.

For instance, if a society
has houses of different sizes and the maintenance charges are decided based on
the house size, there can be an instance where maintenance for certain houses
is below the specified limit and for certain houses is above the specified
limits. In such cases, the exemption will be available for smaller houses with
maintenance lower than the specified limit and no exemption will be available
for houses having maintenance higher than the specified limit.

Registration Related Provisions

Section 22 (1) requires
that every supplier, having aggregate turnover exceeding Rs. 20 lakh in
previous financial year shall be required to obtain registration. The term
“aggregate turnover” has been defined u/s. 2 (6) to mean aggregate value of all
taxable supplies, exempt supplies, exports of goods or services to be computed
on all India basis but shall exclude GST thereof.

It may be noted that the
amounts recovered on account of property tax, water tax, etc., will have to be
excluded while computing the aggregate turnover. This is because they are not
treated as being a consideration received for making a supply (exempt or
taxable).

However, maintenance
charges recoveries which are exempted under Notification 12/2017 would have to
be considered while calculating the turnover of Rs. 20 lakh. Further, the
threshold limit will not apply in case a society is already registered. In that
sense, the threshold limit is a mere misnomer in the context of co-operative
housing society.

Conclusion