GST on Compensation

[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 GST assuming such member is already registered under GST Act.

[KASTURI SETHI]

Dear Sir,

Please elaborate the exact nature of compensation in this scenario. Is such compensation refund of membership fee already paid ? What is the purpose of paying such amount to the members at time of surrender of membership ? Pl post major terms and conditions for , if any.

[Ethirajan Parthasarathy]

Dear Shree Kasturi Seth

As desired, I give below short note on my query.

Social Club’s Bye law will always have a Cap on total number of members. The classification of members normally are lifetime, Resident, temporary.

For each category, some admission fee is fixed which will be very low in the initial years. As the popularity of the club grows, there will be big demand for membership.

It may not be wise decision to increase the maximum number because of infrastructure, staff problems.

While aspirants are willing to pay high admission fee, the club may have some dormant existing members.

The club looses income from such members because they don’t use any facility provided by the club. To accommodate the aspirants, the club rules permit payment of compensation to existing members who voluntarily relinquish their membership.

To give an example a person became a life member in a social club paying Rs.5000 as admission fee may be 30 years back. By surrendering the membership voluntarily now, such member will get compensation of about 1.5 lakhs

Hence my query on Income Tax & GST on such receipt of compensation of 1.5 lakhs.

Ethirajan

[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.

[KASTURI SETHI]

To give an example a person became a life member in a social club paying Rs.5000 as admission fee may be 30 years back. By surrendering the membership voluntarily now, such member will get compensation of about 1.5 lakhs.

Sh.Parthasarathy Ji,

You have used the terms, 'life membership', 'admission fee' and 'compensation '

l 'Fee' is always in lieu of service rendered. It is admission fee and refundable fee or security. The club member has availed club services for thirty years.

With reference to your example given above, such transaction is out of the meaning, scope and essence of the term, 'compensation' as defined in legal dictionary. A compensation is a return for a loss or damage and justice requires that it should be equal in value, although not alike in kind. Damages equivalent to the actual loss in respect to which they are allowed.

Life Membership Admission fee of Rs.5000/- is being compensated for Rs.1.50 lakhs.

l 'Fee' is always in lieu of service rendered. It is admission fee and not refundable fee or security. It is presumed that the club member has availed club services for thirty years irrespective of the fact that he remained dormant for thirty.

[KASTURI SETHI]

in continuation of my above reply ,

------- years. Admission fee stands consumed on account of services availed by the member. Compensation for what ? If the club wants to treat it as compensation, such amount of compensation cannot be more than the actual loss. The fee of Rs.5000/- should be forfeited rather than thinking of compensation. Thus the whole scenario will change. Admission fee is never refundable. Life membership is not for the whole life. It has fixed term and it may be for 15 years, 20 years, 30 years or more. The club wants to get rid of dormant members, it does not mean the club should pay Rs.1.50 lakhs as compensation just for admission fee of Rs.5000/- . It is not digestible.

From your example and the query itself, it appears that your query is hypothetical with an intent to draft terms and conditions for future.

[KASTURI SETHI]

Supposing, in case the social club is so benevolent and generous and hell bent to pay Rs.1.50 lakh in lieu of admission fee of Rs.5000/- (though it is just an example), such amount is consideration and taxable at the hands of the club members.

In that situation, I fully agree with the understanding the issue, interpretation, analysis and conclusion of Sh.Padmanathan Kollengode Ji.

[KASTURI SETHI]

A club and its members are distinct persons----------- AAR Maharashtra reported as in refence The Poona Club Limited. - 2022 (2) TMI 82- AAR Maha.

[Ethirajan Parthasarathy]

Dear Shree Kasturi Seth,

The Query raised by me is not “hypothetical” as concluded by you.

Why anybody should raise a hypothetical question in this forum is beyond my imagination.

I am a member of CA Institute since 1968. I am fully conscious that others’ time is more valuable than that of mine

The narration given in my explanation posted on 06.09.2023 are facts.

The club under reference is not “benevolent” to part with 1.5 lakh as compensation to a life member who surrenders the membership. This is because, the Club Rules provides for 7,00,000 as admission fee for new life member. The Club clearly makes surplus of 5.5 lakh and more income by usage of club facilities by the new member.

The club is also offering to pay 1 lakh as compensation to a “resident” member who is willing to quit because the Ruling rate for admission of new resident member is 4 lakhs.

If you still feel my query is hypothetical, please provide your e mail id and I can share the details of the club and also the relevant bye law of the club covering the payment of compensation on voluntary surrender of membership.

Thanks for your time and efforts to reply my query

I will go by the opinion of Mr.Padmanathan Kollengode

[KASTURI SETHI]

Sh. Ethirajan ParthasarathyJi,

I do not doubt your integrity and sincerity. If you feel hurt, I withdraw my words. Inconvenience caused is regretted.

AI Summary

Compensation for Surrendering Club Memberships Likely Subject to 18% GST, Income Tax Implications Discussed A discussion on a forum revolves around whether compensation paid by social clubs to members who voluntarily surrender their membership is subject to GST. The query initiator explains that clubs may pay such compensation to dormant members to accommodate new members willing to pay higher fees. One expert suggests that this compensation could be considered a supply of service, thus liable for GST at 18%, while another questions the classification of the payment as compensation, suggesting it should not exceed the original membership fee. The discussion also touches on income tax implications, with a consensus leaning towards the GST liability interpretation.