A buildings liability to GST where maintenance services partly entrusted to a provider and partly incurred in-house

[Uday Thakurdesai]

B2 is a building whose routine maintenance has been arranged with a Services Management Company (SMC) through a multi-party contract entered into between the builder, purchaser and the SMC at the time of purchase of the flat. Every member has, in accordance with this contract, placed a deposit with the SMC which, it has placed with a bank. The interest thereon is used for defraying the routine expenses at actuals plus a fixed fee of the SMC for rendering these services. The total expenses incurred by B2 building far exceed the amount of the FD interest. Hence, B2 collects annual contribution from its members in order to meet the remaining expenses as well as those incurred by itself such as office & cultural expenses and bldg insurance premium and non-routine repairs. It does not collect Sinking Fund contributions from its members.

Presently, B2 is not required to be registered under GST – while its annual turnover exceeds Rs. 20 lakh, individual contribution does not exceed Rs. 96,000 incl interest. SMC is duly registered under GST.

The SMC treats the interest on FDs as its revenue inclusive of GST and pays GST thereon. As against this revenue, it books all the relevant expenses so that the net income is approx nil. Thus, it does not incur any liability to pay income-tax on these operations. The relevant sales invoices are treated as cash Thus B2 cannot avail of the ITC in future. SMC is not in favour of issuing such invoices as it would become liable to pay income-tax @30%+ on its interest income. In effect, SMC treats the contract as a composite one which it isn’t in terms of the agreement referred to above.

When B2 undertakes painting, the individual contribution (incl interest) will exceed Rs. 96,000. SMC maintains that the interest amount should not be considered in working out the eligibility of the member to GST.

In this situation, how will B2’s liability to GST be determined – including or excluding interest?

[Sadanand Bulbule]

B2’s liability to GST shall be determined excluding the interest earned on fixed deposits. The said interest represents exempt income under Entry 27(a) of Notification No. 12/2017–CT (Rate) and cannot be treated as consideration for any service.

Consequently, only the actual contributions from members toward maintenance, repair, insurance, or other services will be relevant for evaluating the exemption threshold of Rs. 7,500 per month per member and the requirement of registration under GST.

[Shilpi Jain]

I hope B2 is a residential association. Since the 7500 exemption is available only to a resident welfare association.

Interest derived from FD would not be relevant to assess the 7500 exemption limit. 

Contributions in excess of 7500 would become liable to GST. In such a situation ITC can also be availed by B2.

AI Summary

Interest on members' fixed deposits excluded from GST consideration; only maintenance contributions count for Rs.7,500 exemption A residential building's GST registration and liability hinge on member contributions for services; interest earned on members' fixed deposits held by the service management company (SMC) is treated as exempt and not consideration for services, so it is excluded when assessing the per-member exemption threshold (monthly Rs.7,500) and annual registration limits. Only actual maintenance, repair, insurance and other service contributions determine GST liability; if contributions per member exceed the exemption, the association must register and GST applies, with input tax credit available, while SMC's characterization of interest as taxable service revenue is incorrect for this purpose.