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Service Tax on maintenance charges collected by Apartment Owners Association

 

This is a very ridiculous provision. Assume there are 100 flats in an apartment complex and each of the owners contribute a sum of money towards maintenance of apartment complex. Out of the money so collected, the association will pay towards common area lighting, water, diesel for generators, housekeeping, security, etc. 

In the common parlance, do you find any type of service here? It is a simple case of pooling resources by the flat owners for paying for the amenities used by them. But the service tax department thinks differently and they expect the apartment owners associations (or in their language – Resident Welfare Association RWA) to collect service tax at 12.36% from the owners and pay it to the government.

 

Basic Exemption

  • If the monthly maintenance charges per flat are Rs.5000 or less, then such flats are exempted from service tax net.
  • If the total maintenance charges collected by RWA, comprising of only those flats who are paying over Rs.5000 in a year exceeds Rs.10 Lakhs, then only service tax is applicable
  • Any amount collected by RWA from individual flats as a pure agent to be excluded from the monthly charges. For example, the electricity bill of flat M2 is Rs.1000 per month and the same is collected by RWA and paid to Electricity Company. This is called as pure agent.

 

The above rules can be better explained through an example

  • Suppose in an apartment complex there are 100 flats.
  • Of which, 60 flats are paying monthly maintenance charges of Rs.4500 and the balance 40 flats are paying Rs.6000.

 

Rule 1 – all the 60 flats are not covered under service tax. They can continue to pay Rs.4500 per month

Rule 2 – the balance 40 flats have to pay Rs.6000 plus 12.36% service tax. (It is because the second exemption of Rs.10 lakhs is not available in this case. Rs.6000 per month for 40 flats in a year (Rs.6000*40*12) is Rs.28.80 Lakhs)

 

Cenvat Credits – During the course of availing the service, if RWA has paid Service tax to lift company, housekeeping company, etc., such amount can be reduced while paying the tax to government. For example, in the above case, the RWA will collect Rs.3,55,968 from the owners and while paying to the government they can reduce the service tax paid to lift maintenance, housekeeping etc., say Rs.70000. So, net of Rs.3,55,968 less Rs.28,000 can be paid to the government. (Note – Rs.70000 is for the entire complex, so you can reduce only 40% of Rs.70000 (40 flats out of 100 flats)

Registration – The apartment has to register under Service Tax department. Collect the tax from the flat owners and pay it to the department.

Returns- Half yearly returns to be filed with the Service Tax department

 

Different views expressed by leading consultants

The above explanation is given from the plain reading of service tax law and related circulars issued by the department. However, I have come across different views expressed by leading consultants/subject matter experts in service tax.

According to experts- Out of monthly maintenance charges one can reduce

  • the component of salary paid by RWA to its employees
  • payment towards electricity
  • payment towards sinking fund

Based on the above views, many apartments are not collecting service tax and discharging liabilities.

 

Go for conservative approach

I am of the firm belief that RWA should go for conservative approach and pay the taxes. The reasons for this approach are –

  • The service tax department won’t come back during the year of payment. They will reach you after a couple of years.
  • When they reach you and if they demand you to pay the taxes, RWA has to pay not only Taxes but also Interest and penalty. The interest goes up to 30% per annum and penalty equal to tax liability
  • By the time department comes back to RWA, many owners would have sold their flats! Will the  new owners pay for the liability of the previous owner?
  • If RWA asks the flat owners to pay Rs.750 per month along with Rs.6000, they will just pay it. Suppose, you ask them to pay for 2-3 years along with interest and penalty, it will be close to Rs.1 lakh per flat. Will they pay?
  • If they won’t pay, what will happen? RWA has to pullout the amount from sinking fund and discharge the liability of the service tax.
  • In the above example, for 40 flats, RWA will have to pay an amount close to Rs.30 Lakhs! (considering that the department will approach after 3 years) The RWA sinking fund will sink!
  • During the process, the consultants will make their living!

Want to know, how department can come back? Read this article about NOKIA  Supreme Court judgment says Mobile phone charger is an accessory subject to different tax rate

 

Thought for the day

Telling the truth and making someone cry is better than telling a lie and making someone smile.

 

Circular No.175 /01 /2014 – ST

Certain doubts have been raised regarding the scope of the present exemption extended to Resident Welfare Association RWAs under the negative list approach. These doubts have been examined and clarifications are given vide Circular No.175 /01 /2014 – ST / F. No.354/237/2013-TRU which is reproduced below

 

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About CA Prasad Chartered Accountant

CA Prasad Chartered Accountant
CA Prasad is a practicing Chartered Accountant and partner in Bangalore -based CA Firm. For further information or query, please email it to [email protected]