The recent judgement of the Madras High Court in Greenwood Owners Association v. Union of India WP 5518&1555 of 2020 dated 01.07 2021 quashing the order of the Authority for Advanced Ruling ("AAR") dated 21.06.2019 and holding that Goods and Service Tax ('GST') is payable on maintenance amounts charged by Residential Welfare Associations ('RWAs') in excess of Rs 7500/- seem to be changing the nature of taxation. Though many RWAs felt the single judge's order as a relief for small home owners, the Division Bench of the Madras High Court was quick enough to stay the operation of the single judge's order on an appeal filed by the GST department, as prima-facie, the judgement of the single judge seem to have far reaching consequences.

AAR Under Challenge

S.No.77 of the Notification in Reference No. 12/2017-C.T (Rate) grants exemption to the members of a Residential Welfare Association up-to an amount of Rs. 5000/- per month for sourcing of goods or services from a third person for the common use of its members in a housing society or a residential complex. The said Notification was subsequently amended vide Notification dated 25.01.2018 bearing Reference No. 02/2018-C.T (Rate), enhancing the exemption up to Rs. 7,500/- per month.

Some Residential Welfare Associations (RWAs) interpreted this 'exemption' as 'progressive slab' and sought for a clarification from Central Board of Direct Taxes (CBDT) which was clarified vide AAR order dated 21.06.2019 as follows;

"The exemption from GST on maintenance charges charged by a RWA from residents is available only if such charges do not exceed Rs. 7500/- per month per member. In case the charges exceed Rs. 7500/- per month per member, the entire amount is taxable. For example, if the maintenance charges are Rs. 9000/- per month per member, GST @18% shall be payable on the entire amount of Rs. 9000/- and not on [Rs. 9000 - Rs. 7500] = Rs. 1500/-"

This clarification was challenged by certain Resident Welfare Association (RWAs) in a batch of writ petitions claiming that the original notification provides for exemption of services upto Rs 7500/- and any differential amount in excess of Rs 7500/- alone should be taxed and not the full amount in case the value exceeds Rs 7500/-.

The Madras High Court initially granted a stay on the AAR order and permitted the RWAs to pay GST only in excess of Rs 7500/- and later vide final judgement dated 01.07.2021 allowed the writ petitions in favor of the RWAs and quashed the AAR imposing GST on the full amount in case the amount exceeds Rs 7500/-.

Thus the Judgement came as a huge relief to RWAs and apartment owners across the country as they are now liable to pay GST for the differential amount in excess of Rs 7500/-. However there seem to be a fundamental misconception and the judgement seem to upset the entire GST collection in every aspect because the judgement considers an 'exemption' as a 'progressive slab' by strictly going with literal interpretation of the language and not taking into consideration of the object and purpose of the Act and the basic taxation principle.

Classification And Nature Of Taxation

Taxes are broadly classified as Direct and Indirect taxes. Direct taxes are those which are directly charged to the individual whereas Indirect taxes are those which are not charged to the individual but to the value of the goods/services consumed by the individual. Examples of direct taxes being Income Tax, Property Tax, Corporation Tax to name a few and GST, Cess, VAT are Indirect Taxes.

Direct Taxes are progressive i.e. the rate of tax is directly proportional and will increase with the value of item taxed. Classic example being, Income Tax wherein the tax rate goes upwards on slab of income (For eg; upto Rs 2.5 Lakhs - exempt; Rs 2.5 - 5 Lakhs - 2.5% ; Rs 5- 7.5 Lakhs - 10% and so on). Whereas indirect taxes are flat i.e. it is immaterial on the value of services/goods and the tax rate remains the same throughout with some exemptions to certain goods or services .

Why Direct Taxes Are Progressive And Indirect Taxes Are Fixed/Flat?

The reason behind Direct taxes being progressive is mainly because of the welfare principle that rich should be taxed more and poor should be taxed less. Further the state/government can identify rich and poor based on the income and hence proportional levy of tax on the income is possible.

Whereas Indirect taxes are consumption tax, otherwise known as 'point of sales' tax. The state or the government cannot identify whether a consumer is 'rich or poor' at the 'point of sales' of the goods or services and thus uniform tax is applied on the value of the goods/services rather than on individuals income and hence the flat tax rate. Let us take the example of petrol, government/petrol bulk owner cannot identify a consumer of petrol in a petrol station as to 'whether he is rich or poor' at the point of sales. An owner of a two-wheeler may be richer than a owner of a Mercedes, a rich person may commute in a rental vehicle and so on. The same applies to any one visiting super market, railway station, restaurants etc where it is impossible to charge tax on the basis of a person's income as it is not possible to identify the consumer who walks in is 'rich or poor'.Therefore indirect taxes are designed to be fixed/flat and charged to the goods/services at the 'point of sales'.

Now coming to the case in hand. GST classifies goods/services under various categories and the tax rate depends on that particular category. With respect to maintenance of flats by RWAs, the service is categorized/classified into two viz; (i) service with value less than Rs 7500/- and (ii)service with value more than Rs 7500/- and the former is exempt from GST and latter is under the purview of GST @18% tax rate. The exemption limit of Rs 7500/- cannot be treated as a progressive slab as it will change the nature of GST from indirect to direct taxes.

Misconstruing An 'Exemption' As 'Progressive Slab'

The Madras HC seem to have treated this 'exemption' as a 'progressive slab' and interpreted the provisions of the Notification which will have serious repercussions on the GST system per-se. GST provides for exemptions and classifications on various services/goods. For example, used cars upto 1200 cc engine are taxed at 12% whereas cars above 1500 cc are taxed at 18%. If the view of the single bench judgement is accepted, a person who purchases an used car with 2000 cc engine will pay a pro-rata progressive tax similar to Income Tax i.e. 12% upto 1500 cc and 18% for remaining 500 cc ie, a cumulative total of 13.5%. Likewise, for room tariff in hotels- upto Rs 1000 is GST exempt, 1,001 to [email protected]% GST and [email protected] 18% GST. Therefore if a room rent crosses Rs 1000, ie even for Rs 1,001 the consumer has to pay 12% on the full amount of Rs 1,001 and not on the difference- i.e. not on Re 1 and, so do for other products or services as well. This will lead to multiplicity of litigations challenging the applicability of GST on services/goods resulting in collapsing the GST collection itself.

One of the reasons for providing 'exemption' to maintenance charges less than Rs 7500/- is to support Economically Weaker Sections ('EWS'), who are mainly those with less purchasing power. However, it is not the sole intention as there is no logical reason that only EWS/poor will purchase small houses. It is also to encourage everyone to buy smaller homes so that more people will live closer in clusters sharing common infrastructure resulting in optimal use of natural resources. The Division Bench may correct this judgement failing which it may have serious financial and tax implications across the country.