The Hon’ble Finance Minister of India
New Delhi 110011
Subject: GST on Housing Societies: Review of Circular dated 22.7.2019 reg.
I invite your attention to a recent clarification issued by CBIC, circular number 109/28/2019 dated 22.7.2019, regarding the levy of GST on monthly subscription charges collected by Residents Welfare Associations (RWA). The circular holds that if the monthly maintenance amount exceeds Rs. 7500, residents would have to pay GST on the entire amount rather than the amount which is in excess of the exemption limit. The circular implies that such residents would be denied the benefit of the GST partial exemption notification number 25/2017 though there is no such provision in the notification. This clarification was issued after many RWAs protested the denial of exemption to them by field formations. The language of the exemption permitted their taking exemption from GST up to the permissible level as has been explained in the e-published article attached herewith.
The CBIC without providing an explanation supported the stand taken by field formations. The circular flies against any reasonable interpretation of the notification as well as the normal practice of assessment in similar situations, such as exemption given to small scale industries. The CBIC view is a setback to all RWAs, as well as to cooperative movement in the country. It has not only put a financial strain on many common middle-class families but has worked in the interest of builders who try to retain their control over housing societies long after handing over possession of flats to individual buyers.
GST exemption notification no. 25/2017 is aimed at giving relief to the less affluent middle class city dwellers and the CBIC circular assumes, wrongly, that the per capita expenses on their societies cannot be higher than Rs 7500. The Board presuppose that any household that pays a higher amount of maintenance charges than the amount legislated by them, must be an affluent one which does not deserve an exemption. This view, we will see in the paragraphs following, does not connect with the experience of modern middle-class life in suburban societies.
The habitat of the middle class has changed. Today a person with a modest means is able to buy 1500 sq feet flat, in a high rise building complex in a remote locality. These housing societies may contain up to 2500 flats and they become an open public place. Cost of their flats is relatively low because builders save on the purchase of land, but such complexes are often located in areas where municipal services have not developed well. They cannot be compared with an upper class secure and private gated communities.
Due to the complex operations involved in the maintenance of societies of such size, huge costs are incurred on sophisticated equipment that is either purchased or leased and on specialists who operate them. These professionals perform mechanized sewage disposal, elevators and DG set operation and maintenance, and ensure efficient lighting. Firefighting is especially a great challenge in towers as tall as 28 floors. Security costs are very high as manning the entry-exit of people in a campus of this size needs many guards and electronic equipment. Since these campuses become a locality and are in remote places, the society also maintains parks and children’s play area, jogging path and gym, services which otherwise would be provided by municipal authorities. These do not add up to a picture of the opulent lifestyle and in any case, the incomes of residents keep them in the middle classes. This is the class of people who are being asked to pay GST on the entire value of monthly maintenance charges.
The larger question of public policy is whether a housing society, which, in reality, is local self-government for as many as 10000 residents, is an appropriate object for taxation. The Constitution of India was also amended to incorporate Article 43B which directed the State to promote voluntary formation, autonomous functioning democratic control and professional management of cooperative societies and Part IXB was inserted in the Constitution on the subject of cooperative societies. The State Government laws on apartments mandate that an Association of Apartment Owners must be made for the administration of the affairs in relation to the apartments for the management of common areas and facilities. Further, the Acts make it the joint responsibility of the promoter and the apartment owners to form an Association. The promoter is cast the duty to get the Association registered when such number of apartments have been handed over to the owners which is necessary to form an association or 33% of apartments, whichever is more, by way of sale, transfer or possession, provided the building has been completed along with all infrastructure services and completion certificate obtained from the local authority. The Acts also make it obligatory for an apartment owner to join the RWA.
State Governments have issued model RWAs bye laws that have harmonised the constitution of RWAs. They broadly run on a Presidential form of government in which the executive is kept in check by the General Body and the Registrar of Cooperative Societies plays the role of a referee and judge. RWA has become a vehicle for instilling democratic values in the people, much like Gram Panchayats or Mandal. The public policy is clearly to develop the institution of RWAs, and help them in their creation and running.
A mega society run by a Resident Welfare Association is a quasi-municipal body, which guards its properties and residents, and we could better compare it with a municipality. Such local self-governing bodies have been at the core of the development of democracy in the country since 1882. Services provided by municipal authorities are exempt from GST in all activities covered under Article 243G of the Constitution. Most of the activities in this Article are performed on a smaller scale by housing societies.
The public policy in relation to such societies is also reflected in the RERA Act as well. In section 20(e) a promoter is tasked with the responsibility of enabling the formation of an association or society or co-operative society. Notwithstanding such stringent provisions in support of RWAs the ground reality is that builders do not like to let go of control over the management of facilities of a building complex that they constructed and sold. Many builders have delayed the transfer of assets and continue to manage services long after RWAs are formed. The government must do whatever is within their sphere to promote interests of RWAs. By denying the benefit of partial exemption from GST to RWAs, moral harm is being done to them as cost advantage to this voluntary body over a Builder run maintenance service is being taken away. Considering the nature of activity of RWA, they deserve full exemption from taxes but all of them could at least be accorded partial exemption from GST.
The Hon’ble Finance Minister may kindly get this matter re-examined and have the circular rectified by letting all RWAs avail exemption from GST up to a value of Rs. 7500 in monthly maintenance charges, irrespective of the amount charged by them from the residents. The CBIC may be told to clarify that the GST would be payable only on the portion of monthly maintenance charges that exceeds Rs7500.
Sujit Kumar Sinha
Chief Commissioner of Customs Excise (retd.)
Advocate, Delhi High Court