Whether clubs or associations are liable to pay service tax on the membership fees collected by them?

It is evident that many clubs (including prominent clubs) are not paying services on the following two grounds:

1. Since the services are being provided to own members only, the relationship of service provider and service recipient does not exist and accordingly service tax is not applicable on mutual activity.

2. Since the activities of clubs or associations are in the nature of charitable, the same is not taxable under the provisions of service tax.

To clarify the above issues, CBEC has issued a clarification vide circular / letter F.No. 137/50/2008-CX.4 dated 5-3-2008 in which it is stated that:

1. In view of explanation to the Section 65(105), the first argument is not sustainable. In accordance with this explanation, taxable service provided or to be provided by any unincorporated association or body of persons to a member is a taxable service.

2. In view of its earlier clarification in circular no. 84/2/2006-ST dated 19.9.2006, the nature of clubs or association need to be examined.

Now, if we try to find the meaning of the term "charitable" as clarified in the circular no. 84/2/2006-ST dated 19.9.2006, we find the clarification as follows:

"The definition of "charity" and "charitable" as defined in Black's Law Dictionary may be kept in mind.  "Charity" is defined as "aid given to the poor, the suffering or the general community for religious, educational, economic, public safety, or medical purposes", and "charitable" as "dedicated to a general public purpose, usually for the benefit of needy people who cannot pay for the benefits received".

On the contrary, the same circular denies making any reference to meaning assigned to the term "charitable" under the Income Tax Act, 1961. This circular states that,

"Exemption under the Income Tax Act on the ground of being a public charitable institution is of no consequence to levy of service tax.  Levy of service tax is entirely governed by the provisions contained in the Finance Act, 1994 and the rules made thereunder."

Everyone knows that the concept of "charitable" is very wide and vague term. Since in Income Tax, the issues related to this term are almost settled, we are unable to understand the difficulty before the board in making reference to Income Tax Act, 1961.