Should Societies collect Service Tax from Members

This is a question often faced by newly formed Associations / Societies. Should they collect Service Tax on the Maintenance Charges or not? Do the activities of the Association qualify as a Taxable Service?

From our knowledge of Associations / Societies in India, this seems to be the conclusion:

Yes, Societies / Associations that meet the below criteria must collect Service Tax from Members:

An Association where the Maintenance Charge paid by any household is equal to or above Rs.3000/Month, is liable to collect Service Tax on such Maintenance Charges and remit to the Government.

Update on 16-Mar-2012: In the Budget-2012, Finance Minister has proposed increasing the Rs.3000/month/household limit to Rs.5000/month/household limit.

In such a case, the Association registers itself as a Service Provider and receives the Service Tax Registration Number.

Such an Association can reduce its Service Tax liability to some extent by claiming Servic Tax Credits, which means the net Service Tax payable by the Association to the Govt. becomes:

Service Tax collected from Residents (minus) Service Tax paid to Vendors.

To claim Service Tax Credits, the below criteria must be kept into consideration.

SERVICE TAX CREDIT

As per Service Tax credit Rules, 2002, every service provider (output service provider) shall be eligible to avail credit of the service tax paid by him to other service providers, in respect of the services (Input service) provided by them to him. Such availment should be in relation to the rendering of service by the service provider.

Procedural Requirement

1. If both the input and output services fall under same category of service, credit can be availed in respect of all such input service for which invoice or bill or challan is issued on or after 16.8.2002.

2. If the input and output services fall under the different categories of services, credit can be availed in respect of input services for which invoice or bill or challan is issued on or after 14.5.2003.

3. The output service provider shall be allowed to take such credit only after he makes payment against the bill to the input service provider.

4. If the output service provider also provides either any taxable service which is exempted from payment of service tax or any service which is not at all taxable, the input services on which service tax is paid might be used both in respect of the taxable service as well as the exempted/non-taxable service, rendered by the output service provider. In such a case the following procedure have been prescribed.

1. The output service provider shall maintain separate accounts in respect of the input service availed by him and utilised in the rendering of taxable service as well as exempted/non-taxable service. Credit can be availed only in respect of that quantum of input service, which is utilised by the service provider towards rendering taxable services.

2. If the output service provider opts not to maintain such records, he can utilise service tax credit of his service tax liability, only to the extent of 35% of service tax payable on the output service.

5. Service tax credit in respect of Telephone connection can be availed only if such telephone connection is installed in the premises where output service is provided.

6. In support of the credit availed, the invoice or bill or challan issued by the input service provider shall be preserved. It should contain the following information: Sl. No. of the document, date of issue, description and value of the input service, the service tax paid/payable, service tax registration number and address of the input service provider.

7. The output service provider shall maintain proper records with regard to the availment of service tax credit availed by him.

8. A half yearly return in the proforma in terms of Rule 5(4) of the Service Tax Credit Rules, 2002 has to be filed along with half yearly ST-3 return.

9. The unutilsed balance of service tax cannot be claimed as refund.

Note: The above information is an extract from the CENTRAL EXCISE, CUSTOMS & SERVICE TAX website.

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About the Author: San Banerjee

3 Comments

  1. Why does the activity of an association of residents formed to run the activities of a society and run mainly by volunteer office bearers not count as self service and hence be exempt from service tax? Further, if you look at the budget of a society, most of the budget goes in electricty, water, STP (if applicable), security agency, pest control etc. The assn pays service tax to these vendors anyway.

    This needs to be challenged.

  2. Hello Sanjay. Good Point. You could utilize the Service Tax credits for this reason. When the Input Service Tax and Output Service Tax are towards the same function, the tax to be remitted to Govt. is the delta of the two.

  3. The Maint. Fees normally includes charges for the use of club house. What if the association spilt the fees into 2 segments viz., maintenance fees ( less than ceiling amount) to cover the real maintenance and the rest as membership fees for using the Gym, Spa, sports facilities etc.,

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