Service tax on housing societies

According to a recent amendment in service tax laws, service tax at the rate of 10.2 per cent has to be levied on all co-operative societies having a gross collection of Rs. 4 lakhs and more annually w.e.f. June 16 2005 under the category of Club or Association Service.

Introduction

Section 65(25a) of the Finance Act 2005 defines ‘Club or Association’ as:

"Club or Association" means any person or body of persons providing services, facilities or advantages, for a subscription or any other amount, to its members, but does not include –

1. Any body established or constituted by or under any law for the time being in force; or
    

2. Any person or body of persons engaged in the activities of trade unions promotion of agriculture, horticulture or animal husbandry; or
    

3. 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
    

4. Any person or body of persons associated with press or media;

Thus to summarize, in order to attract service tax the essential ingredients are:–

• A Club or Association means any person or body of person
   

• It must provide services, facilities or advantage to its members
   

• The service must be provided for a subscription or any other amount
   

• It does not include certain specified bodies [as specified above from points a) to d)]

As per para 10.4 of letter from Ministry of Finance (Tax Research Unit) dated July 27, 2005, it is stated:–

Legally bodies which are established or constituted "under a statute" are different from bodies which are "formed and registered" under a statute. Companies and Societies registered under the respective Acts are merely bodies "formed and registered" under these Acts and cannot be treated as "established or constituted" under these Act. Therefore companies or societies would fall outside the scope of clause (25A)(i) of section of Finance Act. In other words, any body formed and registered as a company or society which provides services, facilities or advantages for a subscription or any other amount to its members is liable to pay service tax under section 65(25 a) of the Finance Act, 1994.

Thus, legally based on the scope of the definition of section 65(25a), service tax is leviable on housing societies as all co-operative societies fall under the definition of a club or association providing services, facilities or advantages, for subscription or any other amount, to its members.

Intention of the law

In case if the intention of the law was to tax such housing societies the questions that arise are:–

Was there any reference or remark to such an intention in the Finance Ministry budgetary speech? The answer is NO. There are about 15,000 registered housing societies in Mumbai alone and it is expected that at least 50% of such societies will be covered by such provision. As the effect is substantial, a remark in the speech would be expected to justify the intention of the law.

Further, in the letter from Ministry of Finance (Tax Research Unit) dated July 27, 2005 which explains the scope of new services effective from June 16, 2005, there is no mention of taxing such services provided by a housing society to its members.

Can this be considered as lack of intention of the law to tax such housing societies? It seems that there exist some drafting error in the above definition.

Concept of mutuality

In relation to a Club or Association and its members is there a separate service provider and a service receiver? Can it be said based on the principle of mutuality that the service provider (club/housing society) is the same as the service receiver (member)?

Income-tax Act recognizes the concept of the principle of mutuality (Chelmsford Club vs. Commissioner of Income Tax -(243)-ITR -0089 -SC). However can this concept be also extended to service tax? In absence of specific section or rule in service tax the answer to the above cannot be conclusive.

Service, facilities or advantage

A housing society is by the members, for the members and does not render service to outsiders. Suppose the municipal tax is Rs 1 lakh, instead of each flat owner paying the property tax individually, the society undertakes to collect and pay it on behalf of all the members. This is not a service provided by the society but a mere facility provided to its members. The question arises here is can a definition under service tax also tax facilities and advantages or should such definition be restricted only to the element of pure service?

Commercial concern/profit motive

The question, which arises, is does there exist a profit motive in rendering the above service?

While co-operative societies that are into lending money (co-operative credit societies), selling/trading milk and dairy products, producing sugar and their derivatives can come under service tax as could be said to be operative from a business and profit motive, the same does not hold true for co-operative housing societies. In absence of commerciality element the levy of service tax on such housing societies is questionable. Further, this would lead to unnecessary hardship to the secretary of such societies, who as such is working on an honorary basis, as the onus of compliance with service tax department will lie on him.

Gross amount

Assuming the service is taxable what is the taxable amount? Is the gross amount collected by the society from its members liable to service tax? As per the Author’s personal view, in case the society is able to bifurcate subscription charges and actual reimbursement charges such as ground rent, municipal dues, etc., service tax will be levied only on the balance amount; i.e., the net subscription charges and will not include the actual reimbursable payments. However, the society should be in the position to prove that such collection is on actual reimbursable basis and maintain accounts and records for the same.

Further, the definition as per section 65(25a) states "….for a subscription or any other amount…". On application of the principle of ejusdem generis the meaning of the term "any other amount" cannot include all types of payments received from the members. Some housing societies charge members for the use of facilities such as steam, sauna bath, swimming pool, yoga classes. As per the Author’s view these charges will not form part of the taxable service under the category of Club or Association service. However these services may be made taxable under the category of "Health Club and Fitness Services".

Conclusion

However, from the way things are going in addition to filing their income tax returns, societies collecting a gross amount of Rs. 4 lakh and above, will have to apply for their service tax registration number.
The Author however feels that such a levy may not be the actual intention of the law. Exemption of levy on hosing societies is desired and will definitely be in the interest of the society and Government. Moreover, the liability can be refuted on the grounds of such housing societies being a non-commercial entity.

Stay on tax for services received abroad

Stay against operation of explanation under section 65(105) of the Finance Act, 1994 and rule 2(1)(d)(iv) of Service Tax Rules, 1994 and notification No. 23-2005 dated 7-6-2005 has been granted to the petitioner association for a period of four weeks w.e.f. Feb. 3, 2006.