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  • Tax Matters: Does rent income of housing society attract service tax?

    If the amount received from renting is more than Rs 10 lakh, the society is liable to collect service tax of 15% from its customers and pay the amount to the government

    Our cooperative housing society has a hall that is rented out to members and non-members. The net income generated by rent is more than Rs 10 lakh per annum. Are we liable to pay service tax and the prescribed income tax (IT) rates?

    — S K Agaewal, e-mail

    As per the clarification given by the Commissioner of Service Tax, Mumbai, service tax will be applicable on common electricity usage, repairs and maintenance of elevators, service and car parking fees, insurance, fees for health club facilities and swimming pool, use of terrace by non-members and sale of terrace space and compound for hoarding.

    In the negative list, almost all services are liable for service tax except those which are specifically excluded or exempted. Services provided by a housing society to its members are subject to service tax under the category, ‘Club or association service’. It generally includes maintenance of building, elevator, common area and electricity and water charges. However, there is exemption from service tax up to Rs 5000 per month per member for services provided by the society to members by way of reimbursement of charges or on share of contribution for sourcing of goods or services from a third person for common use of the members. If the society is engaged only in basic activities then the services provided by it will be covered only under, ‘Club or association services’, i.e., society is serving only its members.

    In your case, the society has an independent structure that is being exploited commercially by renting it out to the common public, i.e., members as well as non- members. Accordingly, the service does not fall within ‘Club or association services’ and will be liable for service tax under an independent category of ‘Renting of immovable property’.

    As the society is providing two different services, turnover of both the services needs to be combined to analyse the applicability of the service tax provisions. If the turnover of taxable service exceeds Rs 9 lakh, then the service provider is required to obtain registration within 30 days. On crossing turnover of Rs 10 lakh, the service provider is required to collect service tax from the service recipient.

    In your case, the amount received from renting is more than Rs 10 lakh without considering figures from ‘Club or association service’ category. As such, your society is liable to collect service tax of 15% from its customers and pay the amount to the government. If you are not eligible for exemption provided to small-scale service providers, then you have to collect and pay tax. If the service tax is not collected separately, then you have to pay service tax as determined by reverse calculation method.

    As per Section 139 of the Income Tax (IT) Act, 1961, a person will be liable to IT return if his total income exceeds the maximum amount not chargeable to tax. For co-operative society, there is no basic exemption limit. Therefore, a society is liable to file IT return. Thus, if the society has any taxable income, it has to file IT return. From 1 July 2017, societies in general will be liable for the goods and services tax.

     

    Our housing society is confused about registration under goods and services tax (GST), particularly of certain expenditure incurred on behalf of members. Can you explain the concept of pure agent and reimbursement of expenditure?

    — S Kukareja, e-mail

    The GST Act, 2017, defines an agent as a person including a factor, broker, commission agent, arhatia, del credere agent, an auctioneer or any other mercantile agent, by whatever name called, who carries on the business of supply or receipt of goods or services, or both, on behalf of another.

    Suppose A is an importer and B is a customs broker. A approaches B for customs clearance work for an import consignment. The clearance of import consignment and delivery of the consignment to A also requires taking service of a transporter. So A also authorises B to incur expenditure on his behalf for procuring the services of a transporter and agrees to reimburse B for the transportation cost. The ancillary service of transportation is procured by B on behalf of A as a pure agent. Expenses incurred by B on transportation should not form part of value of the customs broker service provided by B to A.

    Under the GST Valuation Rules, 2017, pure agent means a person who enters into a contractual agreement with the recipient of supply to act as his pure agent to incur expenditure or costs in the course of supply of goods or services or both. He neither intends to hold nor holds any title to the goods or services or both so procured or provided as pure agent of the recipient of supply. He does not use for his own interest such goods or services so procured. He receives only the actual amount incurred to procure such goods or services in addition to the amount received for supplying of services provided on his own account.

    If the contract was for clearance of goods and delivery to the importer at the price agreed upon in the contract, the customs broker is using the transport service for his own interest (as the agreement requires him to deliver the goods at the importers place). Therefore, he will not be considered as a pure agent for the services of transport procured.

    The valuation rules provide that expenditure incurred as pure agent is to be excluded from the value of supply and also from the aggregate turnover. However, such exclusion of expenditure incurred as pure agent is possible only and only if all the conditions required to be considered as a pure agent and further conditions stipulated in the rules are satisfied by the supplier in each case.

    In addition to the condition required to be satisfied to be considered as a pure agent for exclusion from value, the supplier will have to satisfy that he is acting as a pure agent of the recipient of the supply when he makes payment to the third party on the authorization by such recipient.

    The payment made by the pure agent on behalf of the recipient of supply has to be separately indicated in the invoice issued by the pure agent to the recipient of service. The supplies procured by the pure agent from the third party as a pure agent of the recipient of supply are in addition to the services he supplies on his own account.

    If the conditions are not satisfied, expenditure incurred is to be included in the value of supply under GST.

    Services of a pure agent include port fees, custom duty, dock dues and transport charges paid by customs Broker on behalf of the owner of goods. They also comprise expenses incurred by the clearing and forwarding agent and reimbursed by principal such as freight and warehouse charges. Registrar of companies fees, too, are included.

     

    Briefly explain the e-way bill procedure under the goods and services tax (GST).

    — Manoj dated 23rd May, 2017.

    As per the draft GST Model Law, there was no provision for issuance of an e-way bill for transportation of any goods. But after passing the GST Act, 2017, the Union government published the E-Way Bill Rules via the Central Board of Excise and Customs on 14 April, 2017. These rules mandate systematic records of every movement of goods within and outside the state. However, the process seems cumbersome.

    Movement of goods worth more than Rs 50000 within or outside a state will require securing an e-way bill by prior online registration of the consignment.

    The draft rules said that to generate an e-way bill, the details will have to be uploaded on the Goods and Services Tax Network (GSTN) portal. When the registered dealer (supplier or recipient) transports goods in his own or hired vehicle, the e-way bill will be generated by either the supplier or the recipient who has caused the movement of the goods.

    When the registered supplier or the recipient of goods hands over the goods for transportation to transporter, the e-way bill is to be generated by both the parties, i.e., the supplier or the recipient (whosoever has caused the movement of goods) and the transporter.

    When the supplier is not registered and the recipient is registered, then the e-way bill is to be generated at the option of the recipient, either by him or by the transporter.

    If the of value of the transported good is less than Rs 50000, the registered person or transporter, can at their option generate and carry the e-way bill.

    Once an e-way bill has been generated, a unique e-way bill number (EBN) is made available to the supplier, the recipient and the transporter on the common portal.

    A new bill has to be generated by the transporter if the goods are transferred from one vehicle to another. When multiple consignments are to be transported in one vehicle, the transporter needs to indicate the serial number of e-way bills generated for each such consignment.

    Further, a physical copy of EBN along with other documents such as invoice or bill of supply or delivery challan has to be carried by the person in-charge of the conveyance and needs to be produced for verification. Else, a radio frequency identification device (RFID) can be fixed to the vehicle. This device will map the e-way bill and verify it through readers installed at key major check points.

    An e-way bill can be cancelled electronically within 24 hours of generation if the goods are not being transported or the goods are not being transported as per the details furnished in the e-way bill. An e-way bill cannot be cancelled if it has been verified in transit.

    Tax officials will be empowered to inspect any delivery and cross-verify it with the e-way bill to prevent tax evasion. On the other hand, if a vehicle has been detained for more than 30 minutes without a valid reason, the transporter can inform authorities about it on the portal. The validity of an e-way bill is calculated based on the distance travelled. But there is not much clarity on the validity of the e-way bill in cases of delayed delivery.

    Apart from that, there is too much reliance on technology. Transporters, especially in smaller towns, who are not tech-savvy, might fail to comply with the process or complain about detention. Also, given the cost involved in installing RFID devices to the vehicle, not many transporters might opt for it. Logistics and transportation are largely in the unorganized sector and not tax-compliant either. Hence, the proposed e-way bills could come as a compliance burden for them.

    The replies are only in the nature of guidelines. The tax counsellors and the publication are not responsible for any decision taken by readers on the basis of the same.
    Readers may e-mail their queries on direct taxation to: tax-matters@capitalmarket.com

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