Service Tax Implication on Co-operative Society

[Richi Jain]

With the passing of days, a culture to form a Cooperative Society has been increased which helps in pooling of the fund for the own benefit of people. Since, the co-operative society has different structure and formation, it is enthralling to note that how these societies are deal with in Tax laws.

This article attempts to highlight the key areas and implications of Service tax laws on the Cooperative society.

Meaning of Co-operative Society

In general terms, Co-operative Society is a society that work on the joint ownership principle, whereby society is the owner of the entire property and its members have certain share of the society.

A Co-operative Society may be governed by the respective State Co-operative Societies Act or by Multi-State Cooperative Societies Act, 2002.

It can be of any type like Housing Cooperative, Social Cooperative, Cooperative Banks etc.

Co-operative Society under Service Tax

Prior to Negative list Regime

Services provided by society to its members were said to be subject to Service tax under the category of ‘Club or Association Service’. Section 65 (105) (zzze) of the Finance Act, 1994 (the Act) inserted with effect from 16 June, 2005, defined and covered any taxable services provided by a Club or Association in relation to provision of services, facilities or advantages for subscription or any other amount.

Also, as per 65(12) of Banking and Financial provided by the Cooperative Society have the Service Tax implication as it falls under other Commercial Concern mentioned in the said definition.

Post Negative list Regime

As per Explanation 3 to Section 65B (44) of the Act, an unincorporated association or body of persons, as the case may be, and a member thereof shall be treated as distinct persons.

Therefore, any Share fee Collected by the Co-operative banks while issuing share to the members will have the Service tax implication as it act as the Consideration received by the Cooperative banks for providing banking services to their members.

Partial Exemption to Co-Operative Society

Services provided by society to its members are exempt subject to the specified limit in terms of Entry 2 of mega exemption notification no. 25/2012ST dated 20.06.2012. The entry reads as follows:

Service by an unincorporated body or 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)  …

(b)  ….

(c)  upto an amount of five thousand 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.

The exemption provided in the Mega exemption notification is applicable only to ‘housing society’ or ‘residential complexes’. The exemption is not applicable to commercial societies i.e. societies having commercial establishments

Reverse Charge for Co-Operative Society

Cooperative Society are liable to pay Service Tax under Reverse Charge on payments made to Goods Transportation Agency.

Since, Cooperative Societies are not covered under the definition of Body Corporate, no other liability exist on them to pay Service tax under reverse charge.

CENVAT Provisions for Co-Operative Society

It is needless to add that if co­operative housing society is liable to pay Service tax, it can also claim CENVAT credit on input services received by it like security, housekeeping, garden maintenance etc. and utilize the same for payment of service tax.

Threshold exemption for Co-Operative Society

Notification No. 33/2012­-ST provides exemption to small service providers whose aggregate value of taxable services does not exceed ten lakh rupees in any financial year. The Circular dated 10 January 2014 clarifies that small service provider exemption will also be available to co­operative housing society. Thus if the total contribution collected by society during any particular year does not exceed ten lakh rupees then society will enjoy benefit of threshold exemption.

Exemption for Service Tax if Society is working as Pure Agent

The CBEC’s Education guide in para 7.11.8 clarifies that if resident welfare association or any society is working as pure agent i.e. service is provided on actual reimbursement basis or without any mark­up for procuring any goods or services from a third person, then the amount collected by the association / society from its members may be excluded from the value of taxable service, in terms of Rule 5(2) of the Service Tax (Determination of Value) Rules, 2006. For instance, payment of electricity / water bill pertaining to individual member, municipal taxes paid by society on behalf of its members, etc.

Charges collected by society towards common expenses such as electricity for common area, water bill for garden / swimming pool, club house, transfer fees etc. cannot be excluded from the value of taxable services, since in this cases, society is not acting as an agent but incurring these expenses for the members of the society.

Deeming Fiction of two separate identities

A Co-operative Society is registered under the Cooperative Society Act. After registration a society becomes a separate legal entity with limited liability to its members.

The doctrine of principle of Mutuality postulates that all the contributors to the common fund must be entitled to participate in the surplus and that all the participators in the surplus are contributors to the common fund.   It is in this sense that the law postulates that there must be a complete identity between the contributors and the participators.   The essence of the doctrine of mutuality lies in the principle that what is return is what is contributed by a member.   A person cannot trade with himself.

As per the Judgment of Income tax Act, no man can trade with himself I.e. he cannot make in what is its true sense or meaning, taxable profit by dealing with himself.

The High Court of Jharkhand, in the case of Ranchi Club Ltd., decided that in view of mutuality, if club provides any service to its members then it is not a service by one legal entity to another and it is not liable to Service tax

In another decision in case of Sports Club of India, the Gujarat High Court held the taxability of services by club to its members is ultra vires. It relied on the decision of the Calcutta High Court in the case of Saturday Club Ltd., wherein it was held that in a members’ club, any transaction between the club and its members cannot be regarded as service.

This is all the things of past now as the specific provisions override the principle of mutuality providing that the entity having separate legal existence considered as Separate person.

Under the Finance Act, the explanation to section 65B (44) provides a deeming fiction that an unincorporated association or a body of persons (“BOP”), as the case may be, and a member thereof shall be treated as distinct persons and since the concept of mutuality has been done away with the deeming fiction, collections from members become liable for Service tax if they are in the nature of any activity carried out by society for its members.

Also, the point to be noticed here is that the explanation inserted uses the words un-incorporated enterprise only. It does not at all mean that Service Tax will not apply to incorporated Cooperative Society. This is due to the reason that it is obvious that incorporated club being a separate legal entity, the service provided by them to their members are under Service tax net as they are two distinct persons. But explanation to 65B(44) needed to be added to make it amply clear that even if unincorporated club has no separate legal existence but it will be counted as a distinct person from their members in service tax laws to attract Service tax liability.