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?

AI Summary

Whether bank interest on member deposits counts toward each member's GST registration liability under aggregate turnover rules A residential association engages a services management company (SMC) under a tripartite contract for routine maintenance; members deposit funds whose bank interest funds routine expenses and a fixed SMC fee, with the association collecting additional annual contributions for shortfalls and other expenses. The association's aggregate turnover exceeds the GST registration threshold, but individual member contributions (including interest) remain below the per-person limit for compulsory registration; the SMC is GST-registered and treats interest as taxable revenue, issuing invoices that prevent the association from claiming ITC, while resisting invoicing to avoid income-tax. The legal issue is whether bank interest on member deposits should be included when assessing each member's GST registration liability.