S Murlidharan

Going overboard on GST

S Murlidharan | Updated on December 12, 2019

Taxing resident welfare associations and branches for head office expenses allocated are the worst forms of tax tyranny

The government is going overboard on GST. It subjects branches to GST on allocation of head office expenses allocated to them. It is a common accounting practice in companies to load the branches and other profit centres with their share of head office expenses before determining the head office’s and branches’ profits. This is done to arrive at fair profits because branches do depend upon head office support for their survival, existence and performance.

But then such allocation is notional and no money changes hands. Indeed, they simply cannot change hands because after all a branch and head office is nothing but the same entity. That one cannot trade with oneself much less make profit from each other, is axiomatic and forms the bedrock of the mutuality theory, the most fundamental tenet of taxation.

Yet, the GST authorities brazenly defy this time-honoured and time-tested tenet, citing international best practice. The truth is no country commits this tax tyranny that borders on irrationality. To be sure, the GST law requires separate registration in each State for the same entity. While this might have been done for administrative convenience, it does not alter the basic relationship between head office and branch and branches inter se. That the branch is entitled to input tax credit isn’t justification either for this patently wrong impost.

Welfare associations

Of the same piece is the government diktat to bring Resident Welfare Associations (RWAs) under GST if the monthly subscription by a flat owner or occupant is more than ₹7,500 and the annual turnover of the RWA exceeds ₹20 lakh . This is even more ridiculous.

An RWA is by no means a trader. Mutuality underpins its relationship with its members. Yes mutuality is disturbed when there is no complete oneness between the contributors and the participants. To wit, let us say there is a club comprising 1,000 members. Let us say they contribute ₹1,000 each every month. No outsiders are allowed inside the club or to partake of its amenities like tennis court, badminton court, billiards table, etc. Such a club is not taxable under the income tax law. But if it allows entry to outsiders too on payment, the protection afforded by the cloak of mutuality is lost.

To a RWA, the small trader criterion of annual turnover not exceeding ₹20 lakh is inappropriate because it is prima facie not a trading association or body. Certainly its object is not to trade or make profits. If it strays away from the straight and narrow of enuring purely for its members by allowing outsiders to partake of its amenities like community hall, it loses the character of being a mutual association because there is no complete match between the contributors and participants.

But by and large RWAs enure solely for their members. Be that as it may. Another irrational criterion is monthly maintenance exceeding ₹7,500 per month. This is not only irrational but also arbitrary. Assuming without admitting an RWA is a service provider how does it matter whether it charges ₹1,000 per month or ₹10,000 per month?

Let us say an RWA charges ₹4 per square foot per month as maintenance subscription. A flat measuring 1,000 square feet would attract a maintenance subscription of ₹4,000 per month and escape GST whereas a flat measuring 2,000 square feet would attract a monthly maintenance of ₹8,000 and hence fall into the GST dragnet. This is totally irrational.

To be sure, a larger flat may warrant greater maintenance charges for the RWA but if it is deemed to be the service provider for the second flat, equally it is service provider for the first one too in the example on hand. Sauce for goose is also sauce for gander. Of course this is the second or secondary argument against imposing GST on RWAs. The first and primary one is they are mutual associations, period.

Mutual associations are immune from taxation. Government must realise this and spare head offices and branches as well as RWAs from GST.

The writer is a Chennai-based chartered accountant

Published on December 12, 2019

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