Taxability of Resident Welfare Association or Apartment Owners Association under the provisions of Income Tax Act, 1961

Due to modernization, people are living in complexes and townships with many other persons sharing many common areas. Gone are the days, when people were living own houses in a single piece of land. Now, a single piece of land is shared by many house owners. This is when the concept of Resident Welfare Association (RWA) or Apartment Owners Association has come into existence.

The birth of Resident Welfare Association (herein after referred to as ‘RWA’) is guided by Section 11(4)(e) of Real Estate (Regulation & Development) Act, 2016. The said section mandates that promoter should enable the formation of RWA under the local laws. In absence of such local laws, the section mandates that RWA must be formed within 3 months from the majority of allottees having booked their apartment.

RWAs are body that represents the interest of people living in a community or a society. These are formed primarily with an objective to protect and upkeep the welfare of all the members who are the owners of apartments forming part of such residential complex. They are responsible for managing day-to-day problems of the residents, organizing events, managing facilities in the apartments and complexes and safeguarding the rights of the unit holders. 

All RWAs are incorporated with intention of ‘no profit no loss’ and guided by bye-laws which are agreed at the time of incorporation. On the basis such bye-laws, different RWAs collect different types of fees from members for provision of certain services. The most common fees are corpus, admission fee, transfer fee, No-Objection Certificate fee and other similar items.

Majority of RWAs in their bye-laws have modus operandi which must be adopted for each type of fee charged by them . The bye-laws would also contain provisions dealing with accounting treatment of such fee, purposes for which a particular fee can be used, purposes for which a particular fee cannot be used, the timing of usage, the necessary approval for such usage, the nature of investments into which the idle funds of RWAs can be made into and various other aspects. Apart from the said fee, RWAs will also collect monthly maintenance charges from all the members against provision of specific services. The services will include the upkeep of common area, common amenities, security services and various others.

An RWA is formed by electing members among the residents. Once members are elected and association is formed it may get it registered under the Societies Registration Act, 1860. Every RWA has a President, Treasurer and Secretary to carry out various roles effectively.

Status of Resident Welfare Association (RWA) under the Income Tax Act

The Income Tax Act, 1961 has defined the status of various categories of the assessee as 'person'. Section 4 is the charging section under the Income Tax Act, 1961, and it imposes a tax on the income earned by a person in the previous year. ‘Person’ has been defined in section 2(31) of the Act to include an association of persons or a body of individuals, whether incorporated or not. [Section 2(31)(v)]

Analyzing its plain ordinary meaning, the Supreme Court observed in the case of CIT v. Indira Balkrishna (1960) 39 ITR 546 that the word 'associate' means according to the 'Oxford Dictionary', to join in common purpose, or to join in an action'. Therefore, an 'association of persons', must be one in which two or more persons join in a common purpose or common action, and as the words occur in a section, which imposes a tax on income, the association must be one the object of which is to produce income, profits or gains.

The explanation inserted in clause (31) to section 2 of the Act with effect from April 1, 2002, provides that an association of persons will be deemed to be a person whether or not it is formed with the object of deriving income. In other words, it is not essential that an AOP should necessarily produce income.

Hence, for the aforesaid reasons Resident Welfare Association (RWA) is categorized as the 'Association of Persons' (AOP) under the Income Tax Act, 1961.

Income Tax liability of Resident Welfare Association

Section 28(iii) of Income Tax Act, 1961 deals with profits and gains arising from business or profession (for brevity ‘PGBP’) with respect to income derived by a trade, professional or similar association from specific services performed to its members.

In other words, an income would be classifiable under PGBP, only when such income is earned from rendering specific services to its members. If the services provided to its members are universal and general in nature, such income is not covered under Section 28(iii).

Thus, the income earned by RWAs by providing services or goods to its members in general is not  subjected to income tax by virtue of Principle of Mutuality . The legislature vide Section 28(iii), tries to cover only income earned from provision of specific services to its members and not the general.

The Honorable Supreme Court in various occasions has held that the societies, clubs or companies will be exempt from payment of tax by adopting the Principle of Mutuality. However, the Honorable Supreme Court in the matter of CIT v. Bankipur Club Ltd. (1997) 226 ITR 97 : 140 CTR 102 : 92 TAXMAN 278 (SC) held that profit earned by clubs from making sales to its members is not tainted with commerciality and cannot be said that such club is denied of exemption based on principle of mutuality. Hence, all the incomes collected from the members by RWAs will be exempted based on the principal of mutuality and accordingly, there would not be any implication of income tax on such receipts.

Income Tax exemption on mutuality basis

The concept of mutuality means that there is no scope for individual profits or gains. Complete tax exemption is given for funds or surplus where the concept of mutuality applies. Associations such as apartment owners’ association or any mutual association run on subscriptions obtained from members for maintenance, mutual help, and recreations, whether periodically made or received as entrance fee or as ad hoc contributions from time to time are all exempt on mutuality basis in the view that no one can make income out of himself. The principle of mutuality derives from the concept that income earned by a person from external sources is taxable. Thus income derived from oneself cannot be treated as income thus cannot be taxed. Theses associations run on subscriptions obtained from members and this is exempt on the mutuality basis in the view that no one can make income out of himself.

Sources of Income of a Resident Welfare Association (RWA)

The sources of Income of an RWA  and their treatment under the provisions of the Income Tax Act, 1961 are as under:

(i)  Member’s Contribution-

Members' contribution is the primary source of funds for an RWA. All the members contribute to a common fund which will be utilized for the benefits of the members. RWA collects contribution from members and is incurred for the welfare of members. Amount collected is spent for maintenance of common area. Members’ contribution, electricity charges, penalties, interest charged on outstanding maintenance charges, etc. are the typical contribution by members of the Association. The association merely works as an agent that collects these charges and uses them for various common expenses. It acts as agent of members and thus no income tax is charged on such contributions. Any surplus during a fiscal year is carried forward to the next fiscal year

(ii)  Interest on Bank Deposits

RWAs generally have a bank account as well as an FD in a nationalised or co-operative bank. for paying the expenses. All the money collected is not required to be spent or paid immediately and thus are invested in fixed deposits with the banks. The interest earned from these accounts is subject to taxation under the head ‘Income from Other Sources’.

Full deduction under section 80P(2)(d) in respect of any income by way of interest derived by co-operative housing society from its investments with any other co-operative society  is available on interest on FD with other co-operative banks.

(iii) Rental Income from Advertisement Hoardings or mobile towers or open space or terraces

Some RWAs also earn rental income from hoardings of various business organizations allowed to install on the complex. Rents are also received from the cell towers allowed to be installed on the roof-top of the complexes. All these income go to the association which are again expended only for the common activities of the association. This is fully taxable as income from other sources. However expenses can be claimed against such Income. Rents received from members for common facilities is not taxable due to Concept of Mutuality.

Open spaces and terraces can be rented out to members as well as outsiders. If the area is rented out to Members then the income will not be taxable. However, if the rent has been received by non-members then the income is taxable.

 (iv) Parking and Shop Rental Charges

Such charges may be collected from the member or non-members of the association.

Parking charges levied by members is not liable for tax as it is part of the income that is paid by members for the services used by the members. However, the amount that is earned from outsiders vehicles is liable for Income Tax. Some societies have shops within its premises. The maintenance charges and any other income earned from these shops are taxable if it serves non-residents. But if it is only for the purpose of the residents, then any income earned from it is not taxable.

(v)   Transfer fee

Whenever a member transfers his share, rights and interest in a property, the member has to pay a transfer fee to the housing society. According to the Model Bye Law, the transfer amount is to be fixed by the general body meeting. However, the amount shall not exceed Rs. 25,000. This amount is taxable under the Income Tax Act.

Tax rate Applicable

(a)   Where a resident welfare association is registered as a Society-
In this case, the slab rates as applicable to an Individual shall be applicable to an RWA. The RWA will be subject to tax rates as an AOP.

(b)    Where a resident welfare association is unregistered-
The tax rate of unregistered RWAs is the Maximum Marginal Rate of Tax applicable to the members of the RWA. Since in RWAs all the members are individual, the tax rate of unregistered RWAs is at a flat rate of 30 percent without any basic exemption limit.

PAN for RWA

PAN is not only required to file a return of income, but it is also required to carry on certain high-value financial transactions. Further, opening a bank account a PAN is asked for. So even if legally an RWA is not required to obtain PAN under the Income Tax Act, it is advisable to get a PAN of the association for the smooth functioning of the society. Further, to get the credit of TDS on the interest income from bank deposits, PAN is required.

Income Tax return

Filing of return of income for an RWA

Section 139(1) mandates every person to file a return of income within the prescribed due date if the total income exceeds the basic exemption limit. In case the total income of the RWA does not exceed the basic exemption limit, then an RWA is not under a legal obligation to file a return of income. Further, if the bank deducts TDS on the interest income then the refund thereof can be claimed only by filing a return of income.

Thus to conclude with we can say that if Income received by RWA from Non Member exceeds the taxable limit then only RWA is liable to file the Income Tax Return in Form ITR-5. Most of the RWAs got TDS deducted on interest income from banks thus they should file ITR to claim refund of their TDS dues. Tax rates applicable to AOP are same as that of applicable to Individuals.

RWA is liable to deduct TDS on payments

Normally, an RWA makes the payment to contractors and professionals (Engineers, etc.) since the activity of an RWA is confined to maintenance activity.

TDS on Contractor

The provisions related to the deduction of income tax from payment to contractors are contained in section 194C of the Income Tax Act.  Section 194C requires deduction of tax from the payment to resident contractors including advertising contract at the rate of -

(a)  1% on the payment amount if the contractor is an individual or Hindu Undivided Family
(b) 2 % on the payment amount in any other case.

THRESHOLD LIMIT 

No income tax deduction is required under section 194C if the payment to a contractor-
(a)  under a single bill/transaction does not exceed Rs. 30,000, or
(b)  in aggregate in a financial year does not exceed Rs. 1,00,000.

For example, if a registered society engages an electrical contractor to carry out certain electrical work in the complex and the value of contract work is more than Rs. 30,000 then the society is liable to deduct TDS @ 1% or 2%, as the case may be, on the amount paid to the contractor.

A person when makes a payment to a contractor or a professional above the prescribed threshold limit then he is liable to deduct income tax or TDS from such payments.

TDS on Professionals

The provisions related to the deduction of income tax from payment to professionals for professional services or technical services are contained in section 194J of the Income Tax Act.

Section 194J requires deduction of income tax from the payment to resident professionals at the rate of 10%  if the payment to such professional exceeds Rs. 30,000 in a financial year, whether singly or in aggregate.

The term ‘Professional Services’ means services rendered by a person carrying on (i) Legal; (ii) Medical; (iii) Engineering or architectural profession or accountancy profession; (iv) Technical consultancy or interior decoration or advertising; or (v) such other profession as notified by Board for the purpose of section 44AA.

Goods & Services Tax (GST) exemption

The GST law also provide an exemption vide Entry 77 of Notification No 12/2017 – CT (R). Said Entry provides an exemption for services provided by an unincorporated body or a non- profit entity registered under any law for the time being in force, to its own members by way of reimbursement of charges or share of contribution upto an amount of Rs 7,500/- per month per member 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. Hence, if the contribution per member per month does not exceed Rs 7,500/-, then RWAs need not charge and collect tax from its members. In case, if the contribution per member per month exceeds Rs 7,500/-, then RWAs must collect tax from its members.

GST registration for RWA

If the aggregate turnover of RWA exceeds ₹ 20 Lakh in a financial year, it shall be required to take GST registration. 

When is GST liability applicable on RWA

RWA shall be required to pay GST on the monthly maintenance or contribution charged from its members, only if:

(i)         The maintenance is above ₹ 7500/- per month per member; and 

(ii)   The annual aggregate contribution from members of RWA is ₹ 20 lakhs or above, i.e. if it has GST registration.

The Central Board of Indirect taxes and Customs (CBIC) vide Circular No.109/28/2019- GST 1 22 07-2019 F. No. 332/04/2017-TRU dated 22.07.2019 has notified that if the annual turnover of Residents Welfare Association (RWA) is not more than ₹ 20 lacs in the previous year, then GST is not payable by the concerned RWA. The GST liability shall not arise even if the monthly contribution by the residents goes beyond ₹ 7,500/-. 

Circular No.109/28/2019- GST 1 22-07-2019 F. No. 332/04/2017-TRU

Government of India

Ministry of Finance Department of Revenue

(Tax Research Unit) New Delhi, the 22nd July, 2019

Subject:  Issues related to GST on monthly subscription/contribution charged by a Residential Welfare  Association from its members- regarding

A number of issues have been raised regarding the GST payable on the amount charged by a Residential Welfare Association for providing services and goods for the common use of its members in a housing society or a residential complex. The same have been examined and are being clarified below.

S. No.	Issue	Clarification
1	Are the maintenance charges paid by residents to the Resident Welfare Association (RWA) in a housing society exempt from GST and if yes, is there an upper limit on the amount of such charges for the exemption to be available?	Supply of service by RWA (unincorporated body or a non- profit entity registered under any law) to its own members by way of reimbursement of charges or share of contribution up to an amount of Rs. 7500 per month per member for providing services and goods for the common use of its members in a housing society or a residential complex are exempt from GST. Prior to 25th January 2018, the exemption was available if the charges or share of contribution did not exceed Rs 5000/- per month per member. The limit was increased to Rs. 7500/- per month per member with effect from 25th January 2018. [Refer clause (c) of Sl. No. 77 to the notification No. 12/2018- Central Tax (Rate) dated 28.06.2019]
2	A RWA has aggregate turnover of Rs.20 lakh or less in a financial year. Is it required to take registration and pay GST on maintenance charges if the amount of such charges is more than Rs. 7500/- per month per member?	No. If aggregate turnover of an RWA does not exceed Rs.20 Lakh in a financial year, it shall not be required to take registration and pay GST even if the amount of maintenance charges exceeds Rs. 7500/- per month per member. RWA shall be required to pay GST on monthly subscription/ contribution charged from its members, only if such subscription is more than Rs. 7500/- per month per member and the annual aggregate turnover of RWA by way of supplying of services and goods is also Rs. 20 lakhs or more.
		ANNUAL TURNOVER OF RWA	MONTHLY MAINTENANCE CHARGE	WHETHER EXEMPT?
		More than Rs. 20 lakhs	More than Rs. 7500/-	No
			Rs. 7500/- or less	Yes
		Rs. 20 lakhs or less	More than Rs. 7500/-	Yes
			Rs. 7500/- or less	Yes
3	Is the RWA entitled to take input tax credit of GST paid on input and services used by it for making supplies to its members and use such ITC for discharge of GST liability on such supplies where the amount charged for such supplies is more than Rs. 7,500/- per month per member?	RWAs are entitled to take ITC of GST paid by them on capital goods (generators, water pumps, lawn furniture etc.), goods (taps, pipes, other sanitary/hardware fillings etc.) and input services such as repair and maintenance services.
4	Where a person owns two or more flats in the housing society or residential complex, whether the ceiling of Rs. 7500/- per month per member on the maintenance for the exemption to be available shall be applied per residential apartment or per person?	As per general business sense, a person who owns two or more residential apartments in a housing society or a residential complex shall normally be a member of the RWA for each residential apartment owned by him separately. The ceiling of Rs. 7500/- per month per member shall be applied separately for each residential apartment owned by him. For example, if a person owns two residential apartments in a residential complex and pays Rs. 15000/- per month as maintenance charges towards maintenance of each apartment to the RWA (Rs. 7500/- per month in respect of each residential apartment), the exemption from GST shall be available to each apartment.
5	How should the RWA calculate GST payable where the maintenance charges exceed Rs. 7500/- per month per member? Is the GST payable only on the amount exceeding Rs. 7500/- or on the entire amount of maintenance charges?	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/- .

2. Difficulty, if any, in implementation of the Circular may be brought to the notice of the Board.

KEY NOTE

In case the charges exceed Rs 7,500 per month per member, the entire amount is taxable. For example, if the maintenance charges are Rs 9,000 per month per member, GST @18 per cent shall be payable on the entire amount of Rs 9,000 and not on (Rs 9,000 - Rs 7,500) = Rs 1,500,

Taxability of Income of Resident Welfare Association (RWA)

A Resident Welfare Association (RWA) is an Association of Persons for income tax purposes, which is a separate person under the Income Tax Act. An AOP is liable to pay tax on its income earned during a financial year. Hence, a Resident Welfare Association (RWA) is also liable to pay tax on its income earned during a financial year. However, an RWA is not always liable to pay income tax on its income. Only those incomes which arise from non-members or non-mutual activities are subject to tax under the Income Tax Act.

Computation of income of RWA

Particulars	Association is registered as a society	Association is unregistered
Income from maintenance Charges
Gross Receipts	50,00,000	50,00,000
Less: Expenses	40,00,000	40,00,000
Net Surplus from maintenance receipts	10,00,000	10,00,000
Income from Other Sources
Rental Income	40,000	40,000
Interest income from bank fixed deposit	1,80,000	1,80,000
Total Income	2,20,000	2,20,000
Tax Payable	Nil	66,000
Disclosure in ITR:
Status	AOP/BOI	AOP/BOI
Sub-status	Society	Any other AOP/BOI

KEY NOTE

(i)        The net surplus from maintenance receipts of  Rs. 10,00,000 is not liable to be taxed due to the concept of mutuality. It is not income per se. The same can be disclosed in ITR as ‘Exempt Income’ in Schedule-EI of ITR-5. [In Column 4 ‘Other exempt income, (including exempt income of minor child) (please specify)’ under 'Details of Exempt Income (Income not to be included in Total Income or not chargeable to tax)']

(ii)      It may be noted that the ITR utility does not take cognizance of the concept of mutuality, hence, disclosure of income/receipt as exempt income is the best option.

(iii)    In the case of a registered society, the slab based rate of tax as applicable to an Individual applies to an AOP. Since the basic exemption limit is Rs. 2,50,000, no tax is payable.

(iv)     In the case of unregistered society, the tax rate is applied at the Maximum Marginal Rate of 30 percent.

(v)     The rental income from letting of the terrace will be taxed under the head 'Income from other sources' and not under the head 'Income from house property' since the association is not the owner of the building.