CommonFloor’s RightStep event which took place on the 1st of March, 2014, commenced with Mr. Murali Iyer speaking about the basic principles of Accounting, Auditing and Money Management in Apartment Communities.
This session was followed by a string of questions from the audience. Below, you will find detailed answers to these questions.
1) Do we have a set off available for service tax? Can I get a refund of service taxes?
RWA may avail the credit of service tax (called CENVAT credit) paid on the input
services and use the same for payment of service tax liability, in accordance with the
CENVAT Credit Rules.
However, refund of such service tax credit is not allowed. It can only be adjusted against
the service tax liability.
Excess service tax credit may be written off so that at least deduction from taxable
income under Income Tax can be claimed.
2) In most communities, amount of service tax paid is much higher than sum of amount
collected. Is getting a refund possible?
No, getting a refund is not possible. Please refer to answer of question no. 1 mentioned
3) How does one deal with the service tax monster?
The only way to deal with service tax is to ensure compliance with its requirements i.e.
collection, remittance of service tax and filing of half-yearly returns within due date in
the manner specified in the law.
4) What is the definition of Maintenance charge?
Precise question is what do you do with the water that we supply? Do I add it into or
separate it from maintenance fee as it makes a lot of difference. Do you have any clear
idea about this?
Value of taxable services would not include electricity charges and water charges paid
by association and reimbursement obtained from the members, provided:-
i) Bills are issued in the name of the owner of the apartment
ii) No commission or consideration is collected by the association.
Value of taxable services would however include amounts collected as electricity
charges falling within common area charges where invoice is issued in the name of
RWA since there is no principal-agent relationship.
(Note : point no.3 of the attached circular)
In Rule 5(2) of the Service Tax (Determination of Value) Rule, 2006, it is stated that
expenditure or costs incurred by a service provider as a pure agent of the recipient of
service shall be excluded from the value of taxable service subject to the conditions
specified in the Rule.
When the payment of electricity used by members is collected and paid by the RWA
without charging any extra amount as commission or an additional charge by any other
name, the RWA simply acts as an agent and therefore exclusion from the value of taxable services will be available. However, if the bill issued is with respect to common
use purposes such as lifts, motor pumps for water supply and lights in common area, the
exclusion from the value of taxable services would not be available since there is no
agent involved in these transactions.
5) If I collect an x amount as maintenance fee and collect the rest as donation, will that
help bring down my incurred service tax? (Since service taxes are exempted on
donations). Can we have a separate header in place of clubbing everything in
maintenance? Will classifying in separate headers help bring down tax? Will
authorities allow it as an exemption?
You cannot just treat maintenance fees as donation to reduce maintenance amount. The
nature and basis of the transaction will be scrutinized. Also, since collection of donation
attracts various provisions under Income tax law, it will not be exempted that easily.
Creating a separate header is related to accounting and will help in monitoring of
expenses. The nature and classification of expenses will be scrutinized during Audits
and accordingly reported and this will be the basis for taxation purposes. However,
water charges and electricity charges can be excluded if these charges are paid by
association and reimbursement if these are obtained from the members, provided:-
Bills are issued in the name of the owner of the apartment; and
No commission or consideration is collected by the association.
(as further explained in the answer to Question No. 4)
6) If we make a donation, will it be allowed as an income tax exemption?
If we make a donation, then it is allowed as a deduction from your total income.
7) What if we receive donation?
It will not be subject to tax as long as you can prove it is a pure donation. There will be a
legal examination to check the nature of expense.
8) There’s cost of water in maintenance amount and then there’s cost of water that you
buy. Can we deduct it as an expense? If I charge it separately, can I avoid service tax?
Please refer to the answers of questions 1 and 4 mentioned above.
9) Let me paint two scenarios-
i) Collect maintenance money every month and pay
ii) I collect money one time and pay everything
Is there any difference as far as taxation (income tax) is concerned?
This approach would not make any difference in terms of tax liability. According to
accrual accounting concept, the expenses and income will be recognized in the
accounting year to which they relate. As per the Principles of Mutuality, the excess of
income over expenses relating to member contributions and expenditures will not be
In the second instance, in case the money collected one time is parked in the bank as
deposit, the interest earned on the same will be taxed.
10) We happen to pay taxes twice, once while procuring and the next while
distributing borewell water. Is there a way to avoid collecting service tax from
RWA may avail CENVAT credit and use the same for payment of service tax in
accordance with the CENVAT Credit Rules. (Setoff of service tax output against service tax input is possible)
If a person pays a monthly maintenance of up to Rs.5000/- they are exempted from
paying Service tax.
11) Please clarify the 10 lakh plus taxation concept. How is this collective amount and
its service tax calculated?
If in the previous financial year, the aggregate value of taxable services provided was
less than Rs.10 lakh and in the present financial year the aggregate value of taxable
services provided is also less than Rs.10 lakh, then there is no need to obtain registration
as per Service tax rules.
If in the previous financial year, aggregate value of taxable services provided was less
than 10 lakh but this year aggregate value of taxable services provided is more than 10
lakh, then the Association has to obtain registration under Service tax rules and start
collecting service tax after crossing the threshold of Rs 10 lakh.
If in the previous financial year, aggregate value of taxable services provided was more
than 10 lakh but this year aggregate value of taxable services provided is less than 10
lakh, then you start collecting Service tax from Rupee One. Please refer to the chart
Aggregate value of Taxable Services provided Service Tax applicable
Preceding Financial Year Current Financial year
Less than 10 lakh Less than 10 lakh No service tax
Less than 10 lakh More than 10 lakh Service tax appl after 10 lakh More than 10 lakh Less than 10 lakh Service tax applicable from
Rupee One, No exemption
12) Can I classify water charges as external water charges and not add it in
maintenance to bring down maintenance amount?
Please note that you cannot just classify water charges as external water charges in
place of adding it in maintenance to avoid paying service tax. It will be subject to legal
This matter is a little bit of a grey zone and if it will save you from tax or not is really a
matter of interpretation of the authorities. You will have to present proper reasoning.