Three months have passed since the Goods and Services Tax (GST) was applied to housing societies/apartment associations, yet protests and confusion prevail. Resident Welfare Associations (RWAs) collect monthly charges from residents, to provide goods/services for their common use. Now RWAs have to register under GST and pay tax on the monthly charges they collect; this tax burden is passed on to residents.
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So, instead of being the end consumer, the association is seen as a service provider to the residents. Association has to pay taxes to the vendor while buying the product, and then collect taxes from residents on maintenance charges to pay the government.
This law applies only to associations where residents pay a monthly maintenance above Rs 5000 and their total annual contribution exceeds Rs 20 lakh. In such apartments, members paying monthly charges above Rs 5000 should pay a flat 18% tax on it. For example, if a member’s maintenance charge is Rs 6000, he will have to pay an additional 18% – Rs 1080 – as tax.
Apartment associations across the country are sorely disappointed with the new law. They say it is illogical and ignorant, because associations are not businesses that make profits, but are bodies formed for residents’ welfare. R Rajagopalan, a resident of the apartment complex L&T South City in Bangalore, says, “An RWA works on the principle of mutuality – it is not an entity separate from its members. It only collects money from residents for their common use, for convenience. No commission or fee is collected.”
Rajagopalan is also a member of the South City Management Committee (SCMC). He says that unlike in the case of clubs (which are taxed under GST), membership in RWAs is not optional; it is compulsory under law.
GST versus Service Tax
This argument is not new, however. Before GST, associations with a turnover above Rs 12 lakh and monthly maintenance charges above Rs 5000 had to register under service tax, and pay 15% service tax. Housing societies like SCMC had paid service tax earlier, even as they questioned this rule.
Satish Rao, Associate Member of the Management Committee at Le Papillion apartment in Mumbai, says that protests have increased now because the tax burden keeps on increasing. His apartment too had paid service tax earlier. “The tax might have increased by a small percentage only now, but in principle we should not have to pay at all for services that we are providing to ourselves,” Rao says.
Protests have increased also because many apartments that were not in the service tax net will now be covered under GST. So far, most apartments in Bangalore have never paid service tax, says a practising chartered accountant from a reputed CA firm in Bangalore, on condition of anonymity.
“Very few apartments in Bangalore had registered under service tax earlier, because unlike GST, only services were included under it and not goods. If only services are considered, monthly maintenance charges in most apartments would be less than Rs 5000. Also, accounting could be done in a way that more expenses were categorised under goods than services,” he says. Since GST considers both goods and services, many apartments will now come under the tax net anew.
Even associations that are currently exempt under GST worry that they may get affected in future. V C Kapoor, Chairman of Band Stand Cooperative Housing Society in Mumbai, says, “We are below GST limit of Rs 5000/20 lakh now, but if sudden repairs are needed, and we collect higher amounts from residents in a year, we will cross the limit. Also, in a few years, as expenses increase, we will naturally rise above the limit.” A large number of urban apartments currently cross the annual turnover limit of Rs 20 lakhs, though not always the monthly limit of Rs 5000.
Amidst protests by RWAs, the Finance Ministry had issued a notification in July saying that apartments would not suffer any additional expense, as they will get an input tax credit (ITC). In fact the tax burden on RWAs would now go down, as they would get ITC on both goods and services, says the notification.
ITC is the deduction in tax that a business will get for its final product (output) based on the tax it has paid on purchases (input). That is, when the RWA is paying output tax to the government (i.e.,tax collected from residents), it can deduct from that amount the input tax already paid to the vendors.
But here too, the notification implies that the RWA is an entity separate from its members – earlier RWA could not claim ITC, which it now can, thus reducing the final tax burden. It ignores the fact that in effect, the burden is passed on to the home owners, who themselves are the RWA members.
The Bangalore-based CA says that many associations are still confused about the extent of the additional burden. “Some think that the entire 18% tax burden will come on them. But because of ITC, it will probably amount to something like 5-10% – including CA fees. One of our clients, a luxury villa community that was already paying service tax, has incurred an additional burden of 2% only,” he says.
Residents are confused on many other counts. In many large apartments, only a section of members pay maintenance charges above Rs 5000. For example, in South City, only 900 out of the 2000 members do. In such cases, ITC cannot be claimed fully, but only in proportion to the output tax collected from taxpaying members.
In addition to the tedious calculations, there is also the question of how the benefit of ITC will be passed on to residents – whether only taxpayers can benefit from it, or all residents. To pass on the benefit, some associations are considering reducing the maintenance charges of tax-paying members alone – for example, reducing their charge to Rs 2.35 per sq ft while retaining that of others at Rs 2.40.
SCMC had given a representation this July to the Principal Commissioner of Central Excise and Service Tax, Bangalore Zone, about this. “When we claim ITC, we claim it as an association, and not just on behalf of the members paying taxes. So if we pass on the benefit of ITC to taxpayers alone, by reducing only their maintenance amount, it could mean ‘unjust enrichment’ — that we are not collecting as much tax as we should be,” says Rajagopalan. He says that SCMC has taken a conservative approach so far, going exactly by the rules.
Tax on utility charges
Another major question that SCMC raised in its representation was about common water and electricity charges. Under GST, neither water nor electricity supply are supposed to be taxed. But this is only when the RWA acts as a ‘pure agent’ for the member – that is., if the bill is in the name of the flat owner and is merely collected and paid by the RWA. But if the bill is in the name of the RWA itself, RWA is considered a service provider, and should collect tax.
Rajagopalan says that the common water and electricity charges in South City come to about Rs 1600 per flat per month. “This is because the city’s water supply utility BWSSB considers apartments as bulk consumers, and insists on a common water meter. Electricity charges for common areas are also shared equally among members. If these charges are deducted from my monthly maintenance amount of Rs 6000, I will be below the GST limit and won’t have to pay taxes,” he says.
But it is unclear if utility charges can be separated from maintenance charge. Rajagopalan says that the Principal Commissioner did not respond to these questions, but only forwarded them to the GST Council on grounds that these are policy matters.
Currently, some apartments do separate their utility charges, while some don’t, worrying about any legal action in future. So, in many cases, residents end up paying taxes on water and electricity that were originally exempted from GST for being essential commodities.
Paying up for the government’s failure!
Chennai-based FOMRRA (Federation of OMR Residents Associations) – an umbrella organisation of RWAs in the OMR area of the city – has a different take on this. They say that the maintenance charges of apartments are high in the first place because of the lack of government services; and it is on these maintenance charges that the government is levying taxes again.
Ravi Kumar, resident of Ceebros Boulevard apartment which is part of FOMRRA, says, “Apartments in OMR do not get municipal water supply,or a facility to let out treated effluents etc, which causes our maintenance costs to go up. Now if RWA collects tax on this amount too, residents will not accept it.”
Mounting paperwork and other concerns
Another issue that RWAs are grappling with is the sheer number of returns to be filed from now. In the case of service tax, only two returns had to be filed in a year. But under GST, it is 37 – three per month, plus an annual return. As per a recent relaxation, only 13 returns in a year are needed, if the RWA’s annual turnover is below Rs 1.5 cr. But the Rs 1.5 cr limit is also easily exceeded in apartments like South City, that have a large number of units.
Umesh Malasane, Chairman of Regency Cosmos Cooperative Society in Pune, says this burden would be too high since most RWAs are managed by volunteers, and do not have a full-time accountant. Malasane had started a petition on change.org two months back, asking the Chief Justice of India to withdraw GST on maintenance charges. The petition has received over 37,500 supporters so far. Malasane says that he had forwarded the petition to the Supreme Court and it has been registered as a PIL (Public Interest Litigation), with case number 46511/2017.
The cash flow of apartments too will be affected. This is because returns should be filed regularly, while residents may delay or default on payments. There is also confusion on how GST will apply to sinking funds that are collected for future expenses. Reverse Charge Mechanism, which is currently under review, deters RWAs from hiring unregistered vendors like plumbers. And thus, overall, apartment associations, accountants and tax authorities themselves lack clarity on many questions.
In this chaos, many apartments are relooking at their expenses, trying to rework it in a way so as to avoid or reduce the GST liability. Then again, many are worried that the changes they make may be considered illegal later. In the absence of clarifications from the GST Council, apartment owners and associations continue to be left in the lurch.