Hapless Co-operative Housing Society members slapped with 18% GST and Complex Paperwork

Recent implementation of GST Act in India has not only slapped massive 18% GST on Co-operative Housing Society (CHS) member contributions but also burdened them with very complex paperwork.

If one understands the basic tenet of CHS and its working one would immediately understand the absurdity of this idea of levying financial as well as administrative burden. Here is my argument for not levying GST on CHS:

Why GST should not be levied on CHS?

I. CHS works on no-profit, no-loss co-operative model. Here services are received by members from the elected members of the society. People don't have any alternative but to live in a CHS. When CHS is formed by members, they do it out of necessity; and NOT for entertainment or for profit. Housing is a basic necessity of people.

Slapping 18% GST on member contributions is simply a bad idea emanating from a bureaucratic machinery having no experience of CHS movement. There is no basis to levy any GST on CHS.

II. CHS has a very minimum administrative structure. Its Managing Committee members work without any salary or compensation, while engaging in full time Job or Business. Most of CHS are unable to get qualified staff on salary because government has failed miserably in creation of proper training facilities. Although recent amendment of 2013 provides for training but so far hardly anything exists in reality.

CHS of any size are just not equipped to handle calculation of GST on member collections, calculation of GST on Services rendered to them by unregistered service provider under Reverse Charge Mechanism and filing of 37 GST returns.

III. Service Tax sought to be levied on CHS was set aside by a tribunal in a February 2015 order.

Here is a excerpt from the full report: In a recent landmark decision in the case of Matunga Gymkhana, Tahnee Heights CHS Ltd (reported in STO 2014 CESTAT 792) the Mumbai Tribunal has held that Services to members of club/co-operative housing society is not a service by one to another and therefore it is not chargeable to service tax.

Here is small re-cap on relevant GST provisions on CHS.

SAC 9995 : Service by an unincorporated body or a nonprofit entity registered under any law for the time being in force, to its own members by way of reimbursement of charges or share of contribution – (a) as a trade union; (b) for the provision of carrying out any activity which is exempt from the levy of Goods and service Tax; or (c) up to an amount of 5000 rupees per month per member for sourcing of goods or services from a third person for the common use of its members in a housing society or a residential complex. GST: Nil

SAC 999599: Services Provided By Other Membership Organizations N.e.c. GST: 18%

CHS is required to pay 18% GST under above Service Accounting Code viz., 999599.

Issues troubling CHS with introduction of GST: 

1. CHS collects and pays Municipal tax, Water Charges and Sinking Fund from members. Though there is no GST on this heads, will they be added to the total member contribution to check the 20 lakh threshold per year?

2. This limit of 5,000/- pm for housing society is too low for buildings of Mumbai that have come up in last 15-20 years with lifts and requirement of security guards. If at all government wants to levy GST the limit should be at least 15,000/- pm for 'A' class city like Mumbai, Delhi, Chennai, Bangalore etc.

3. Housing society's management is not capable to comply with filing of 37 Returns and meeting the provisions of Reverse Charge Mechanism of GST. Day to day working of CHS depends on service provided by Un-registered Service Providers (below 20 lakh/year threshold) like  Sweepers, Cleaner of drainage pipes, water tank cleaners, plumbers, electricians etc. RCM provisions should not be applicable to Cooperative Housing Society.

-oOo-

More Reading:
* 5 reasons why living in housing society will be expensive under GST - Economic Times
* Society maintenance bill over Rs 5,000? Pay 18% GST - DNA
* Tax hawks fail to understand CHS yet
* Goods & Service Tax (GST): Background & Declared Rates for Housing Societies - Apartment Adda
* How to avoid GST levy on housing societies - India Infoline
* GST Applicability to Cooperative Housing Societies - Moneylife

Slow, steady and sure death of the Packaged Software Industry in India

It takes Government of India to create a huge great mess - which even God can not create with all powers to His command. Why don't for a while, it keep its hands off on matters it does not understand well? I'm referring to IT software and its delivery models. If they don't understand it, helping hand is extended to them from ISODA (Infotech Software Dealers Association - http://www.isoda.in/), but who wants to acknowledge that a mess is created; and clarity is due to the citizens of India?

Let me put it in plain terms. Government of India (that includes bureaucrats and politicians, all together) is out there to kill the proverbial Golden Goose. They have found the proverbial whipping boy in Indian Software Industry. Whether it's Income tax department, Customs/Excise/Service tax department, State Government's Commercial Tax (VAT) departments or even local Municipal Corporations - it's all same. They are utterly clueless about how to tax (in other words, get their cut) from the neo rich Software Industry. They don't understand it, they don't want to understand it; and they are doing a pretty ugly job. And people are fad up of them.

Let them understand, if at all they want to understand, that due to their acts prices of packaged software have gone up by 30% to 40% compared to what they were in May 2008. And people have reduced purchase of packaged software by more than 40% since then. One reason is they can't afford to pay more for (already) costly packaged software. Another things is that they are willing to take risk associated with piracy. Simply because friendly neighbourhood computer supplier OR systems integrator OR facilities management contractor is ever ready to oblige him.

And, if one is in self service mode; and is willing to do little research on Internet, hundreds of sites are available to supply free download of software. Not to forget that they don't forget to send virus, malware and trojans free of charge to you along with the software download to keep their operations going! Thousands of sites are there offering cracks to bypass vendor's activations. Hundreds of well written articles, videos and tutorials are there telling users how to use the latest and best software products free of charge without worrying about vendor's detection and activation.

Can Government do anything to stop this? I'm afraid, even with their best intention, vast machinery and power they can't stop it. Industry is trying its bit but they are also on the wrong track. First they have get their pricing, licensing and distribution model right. But, unfortunate part is that 'god fathers' of software industry are sitting overseas in comfortable high rise offices, with very little knowledge of ground realities in India.

Only way to stop this slow and sure death of software industry is to bring back sensibility and become reasonable. People are there to pay taxes and high prices, but don't corner them. They are ready to purchase packaged software products provided tax rates are reasonable, laws are clear; and they are not threatened by the vendor to purchase the packaged software. No body like ambiguity and threats - least of all - a common man.

Don't think that with GST (Goods and Services Tax) this confusion will be laid to rest. Sorry. I don't agree because first of all there is no clarity whether packaged software is a goods or service. And in GST there are going to different rates of tax for Goods and Services. If 'packaged software' continues to be both goods and a service then even GST won't able to help it.

In Income tax, there is even a bigger problem. Income tax department wants to tax income from sale of software products saying it is a 'royalty' income; and not a business income. Why? Simply because business income of a overseas supplier is not taxable in India. For example, when HP from USA/Singapore sells computer hardware to a distributor in India, his income is taxed in USA/Singapore and NOT in India.

But as per prevailing laws of India, 'royalty' payment made to overseas supplier is taxable in India. Income tax law is extremely complex and confusing with respect on 'royalty' income. So, Income tax department says that payment made to overseas supplier towards purchase of IT software is a 'royalty'. So, the supplier has to pay tax on the same in India. Income tax department wants its pound of flesh from the hapless software industry. You will say, so what's issue? That means importer is required to pay 'withholding tax' to Income tax department when a software product is purchased from the overseas markets, even when purchased through Internet.

What happens when the overseas supplier refuses to pay 'withholding tax' to the purchaser? And what happens when the payment is made through credit card to the overseas supplier? Of course, person who has purchased it pays the tax from his own pocket, a tax that supplier should have paid. Isn't it ridiculous? But, it's true.

There are simply too many factors working to ensure slow, steady and sure death of the packaged software industry in India. Let me try to list them here below, not in any particular order.

1.  High prices of packaged software products
2.  Ever changing and unclear channel /distribution policies of Vendors
3.  Attitude of distributors towards channel partners
4.  Unreasonably high taxation

a.  10 - 20% Withholding tax on import payment - depending upon country of origin
b.  8% CVD on Media
c.  10% Service tax on 'Right to Use' portion of software at the time of import
d.  10% Service tax on Resale
e.  4% VAT on Resale
f.   3 - 5.5% Octroi / Entry tax on Resale
g.  10% TDS on payment from the supplier
h.  10% Service tax and 10% TDS on Incentives, Rebates and Overriding Commissions

5.  Widely fluctuating Indian Rupee to US Dollar Exchange rate
6.  Reluctance of overseas suppliers to pay withholding tax; particularly on Internet
7.  Easiness of Piracy due to easy availability of resources
8.  Attitude of people i.e., we will manage, when it comes
9.  Channel partners who are happy to be in transaction mode with very low margins and high risk - from Government due to taxation compliance, vendors due to changing channel policies
10.  Poor unity and low communication and collaboration among channel partners
11.  Vendor's direct contact and control on the customers
12.  Direct selling by the distributors to the end users

What's 13th factor?