Surrender of Club Membership

[Ethirajan Parthasarathy]

It is a common feature for social clubs to pay compensation to members on voluntary surrender of their membership. I would like to know experts’ view whether such compensation received is subject to income tax

[KASTURI SETHI]

Dear Sir,

A few year ago (about three years), I read an article titled as 'Compensation cannot be income' published in the Tribune newspaper. The article talked of 'Income Tax'. The author supported case laws in that article. You can search on Tribune website.

[KASTURI SETHI]

https//www.tribuneindia/archive/business/Compensation -that is-not income -non-taxable -829972

[Ethirajan Parthasarathy]

Dear Shri.Kasturi Seth,

Thanks for your feedback.

[Padmanathan KV]

Here, the member is getting compensation from the Club.

1. Let us examine if there is any supply involved here:-

1.1. According to section 7(1), for the purposes of this Act, the expression “supply” includes–

(aa) the activities or transactions, by a person, other than an individual, to its members or constituents or vice-versa, for cash, deferred payment or other valuable consideration

1.2. from the above provision, it appears that activity or transaction done by member to the club for a consideration is treated as supply.

1.3. Unlike clause (a) of section 7(1), the test of "in the course or furtherance of business" is not required for clause (aa). In other words, even if the activity or transaction by member to club is not in the course or furtherance of business, it would still be business.

1.4. Thus, herethe member is the supplier and the club is the recipient.

2. According to Para 5(e) of Sch II, "agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act;" is a supply of service.

2.1. Here, the compensation is fact consideration for surrender of membership and it would be supply of service liable for GST at 18%.

3. If the member is a "taxable person" within the meaning of the Act, then he shall be liable to collect and remit GST. I do not see any restriction for the club to avail ITC of the GST so paid to the member.

5. under income tax, in my view such surrender shall attract capital gains.

They Key-point here is that compensation is not actually "compensation" but it is consideration in my opinion.

AI Summary

GST on membership surrender treated as supply of service, attracting tax and input tax credit implications.
Payments to a member for surrendering club membership are characterised as consideration constituting a supply of service liable to GST; if the member is a taxable person he must collect and remit GST and the club may be able to claim input tax credit. For income tax purposes the surrender payment is treated as consideration giving rise to capital gains rather than non taxable compensation.