Indirect Taxes Cooperative Banks / Housing. Milind V. Sahasrabudhe, M A Y & Co

Transcription

1 Indirect Taxes Cooperative Banks / Housing Milind V. Sahasrabudhe, M A Y & Co milind@camay.net

2 Co-operatives the key distinguishing factor. Co-operative is normally considered to be an entity where the members come together to achieve common goals by sharing fruits of common labour. It is therefore first presumption that it is form of mutual entity where members contribute and work for their own benefits inter-se. The principle of mutuality is first presumption and therefore taxation of such entity is always perceived to be on different footing than other form of pure commercial organisations.

3 Mutuality explained When people work between themselves contribute money within themselves and enjoy the fruits of such efforts within themselves the entity is considered to be mutual benefit entity. Simple rule is there is no contribution from outsider and there is no flow of results to outsiders.

4 Mutual / Non Mutual examples People work on each other s farms and share the crop. Friends group goes for picnic they contribute money. Apna Bazar sales goods to walk in customers. Banks open account for any person whether member or non member.

5 Rationale of Non Taxing Mutual Transactions. Nobody can trade with himself or can make profit out of themselves. If there be surplus it ultimately has to be utilised for the benefit of same body of members whose contributions resulted in surplus. Beneficiaries and contributories is identical body of members. This aspect however has to be tested on contributors body as a whole and it is not necessary that contributories get benefit exactly in ratio of their contributions.

6 Co-operatives essentially mutual? As has been discussed in previous slide just because entity is formed as cooperative society it does not mean all its transactions will be covered by mutuality. Members monthly contributions to Cooperative Housing Society are mutual in character but interest earned by said Housing Society from bank is surely not mutual.

7 Taxation of mutual transactions Mutuality of transactions precludes income tax thereon. Clearly nobody can make profit out of oneself. But does it essentially preclude impact of indirect taxes? Answer is NO because the indirect tax is applied on specific aspect of transaction. We will try and examine aspect theory with respect to indirect taxes.

8 Aspect Theory. Excise is tax on manufacture (though ordinarily payable on clearance of goods). Service Tax is tax on rendering services. Sales tax / VAT is on sell of goods. Ask simple question CAN I to/for MYSELF? If answer is yes -- tax will apply inspite of mutuality.

9 Taxation of non mutual transactions. Simply put tax impact on cooperatives is exactly the same as it would be for any other form of organization qua its non-mutual transactions. Type of organization is irrelevant consideration for determination of primary tax impact. (Subject to specific differences specified in various Acts).

10 Moving to specific sectors From the above discussions it would be clear that for ordinary cooperative business entity the indirect tax implications of non-mutual transactions are exactly the same as it would be for any other business entity in the said business. That would make this presentation cover entire universe of businesses which is neither possible nor the target. The presentation would therefore deal with two predominant sectors in Cooperative field viz. Bank/credit society and housing.

11 Co-op. Bank / Credit Soc / Housing Indirect Taxes In case of Co-operative banks / credit societies / housing societies, imports and manufacturing of goods is unlikely. No issues in customs and excise. Service is bread and butter for Banking and Credit Societies and Service Tax issues need to be discussed at length. VAT?

12 VAT Basic Issue. VAT is generally payable by the Dealer Casual buyer /seller is not liable to pay VAT. Consider a Surgeon selling his BMW car. Value of transaction surely exceeds threshold limit of say Rs. 5 Lakhs. But is he liable to get himself registered under MVAT?

13 Banking / Credit Societies VAT Basic Issue. Is bank a dealer? The question is very very complicated. The matter was dealt with by Hon. Supreme Court in the case of Federal Bank Ltd. and other appellants Vs State of Kerala and Others. reported in 2007-(004)-SCC SC.

14 Banking / Credit Societies VAT Basic Issue. Hon. Supreme Court held that bank is dealer as per definition in Karnataka Act; which specifically included banks, and is liable to pay VAT. But started judgment with preamble that At the outset, we may point out that before us the constitutional validity of Section 2(viii)(g) of the 1963 Act was not argued.

15 Banking / Credit Societies Maharashtra VAT. If we leave aside complicated constitutional validity issue, then whether bank is dealer or not? would be a question; the answer of which would be dependent on definition of the term dealer in the concerned Act. VAT is State subject and every state has different Act and definition of the term. For simplicity, it would be prudent for the purpose of this presentation to cover only Maharashtra.

16 Dealer definition Maharashtra VAT. Dealer means any person who, for the purposes of or consequential to his engagement in or, in connection with or incidental to or in the course of, his business buys or sells, goods in the State whether for commission, remuneration or otherwise and includes,-

17 Dealer definition Maharashtra VAT. a factor, broker, commission agent, del-credere agent or any other mercantile agent, by whatever name called, or an auctioneer who sells or auctions goods whether acting as an agent or otherwise who buys or sells any goods on behalf of any principal or principals whether disclosed or not; any society, club or other association of persons which buys goods from, or sells goods to, its members;

18 Cooperative Banks / Credit So. Housing Societies; MVAT Dealers From the MVAT definition it is clear that Banks / credit societies are dealers under MVAT because even agents and auctioneers are covered by the definition. Co-operative societies buying / selling goods from / to members are also covered. Co-operative societies buying / selling goods from / to non-members?

19 Co-op. Housing and VAT. The biggest controversy in housing sector is VAT applicability to transactions of flat purchases. Issue is very complicated and in my opinion constitutional challenge is open. Presentation proceeds by keeping aside constitutional issue.

20 Co-op. Housing and VAT. Apart from fact that in my opinion Housing Society will not be Dealer under MVAT; when co-operative society is formed, acquires land and itself constructs the flats for members; the VAT should not apply. If individual members enter in separate individual contracts with builder and then society is formed by all such members; the tax on purchase of house will be charged by builder and not by the society.

21 Co-op. Housing and VAT. The other transactions that may attract VAT are ones of granting right to use goods for consideration. Most important thing to remember is Goods do not include immovable property of any kind. Mutuality is aspect that is still contestable.

22 Banking / Credit Societies Maharashtra VAT. Transactions that would attract VAT Sale of old used assets. Sale / Auction of confiscated assets for recovery of debts. Leasing transactions. Any other transactions bearing sale of goods character --- e.g. sell of gold by some banks.

23 Specified Sectors Maharashtra VAT. As far as tax rates go; normal tax rates would apply. The key issues revolve around being careful on the transactions on which tax would be applicable. The other issues will revolve around procedural aspects.

24 VAT Set Off. Key thing to be noted is that it is unlikely that total quantum of taxable sale will constitute more than 50% of total revenues of such entities and therefore set off for such entities will be governed by the provisions of Rule 51 (6). Under this rule set off can be availed only if relevant goods are resold in 6 months from date of purchase.

25 Service Tax Services is surely bread and butter activity of Banks and Credit Societies. Can activities of Cooperative Housing society be regarded as services? Personally I have serious doubt and I would rather look at it as cost sharing activity not amounting to service. The Act however holds different view and same will be discussed at some length.

26 Banks / Credit Societies Service Tax basic categories. Asset Management Services. ATM Operation, Maintenance, Management. Auction of Property. Banking and Financial Services. Brand Promotion Services.

27 Banks / Credit Societies Service Tax basic categories. Business Auxiliary Services. Business Support Services. Credit Card Services. Foreign Exchange Broker Services. Insurance Auxiliary Services. Life Insurance Auxiliary Services.

28 Housing Societies Service Tax basic categories. Builder Related Services. Brand Promotion Services. Business Exhibition Services. Club or Association Service. Construction of Residential Complex. Construction Services.

29 Housing Societies Service Tax basic categories. Convention Services. Health Club Fitness Center Services. Hotel Accommodation Services. Management Maintenance and Repairs. Mandap Keeper Services. Pandal and Shamiyana Services. Renting of Property Services.

30 Banks / Credit Societies Key Service Tax aspects. Classification issue is key in light of the fact that services like Asset Management, Forex Broking, are also covered under the category Banking and Financial Services. Cooperative Banks are surely covered under Banking and Financial Services. But whether Credit Societies are commercial concerns is open for debate; depending upon the constitution. Hence they may not be covered under Banking Services.

31 Banks / Credit Societies Key Service Tax aspects. Asset Management Services: Not applicable to institutions covered by Banking Services Category for them as it is chargeable under category of Banking Services. Applicability to Credit Societies questionable. ATM Operation, Maintenance, Management. Banks will be service providers only when they share the ATM.

32 Banks / Credit Societies Key Service Tax aspects. Auction of Property. Tax will be attracted on amount charged to customer for auction. Normally this will be input service also. It is however not advisable to walk path of claiming this as non taxable reimbursement; even though it might lead to some input credit loss.

33 Banks / Credit Societies Key Service Tax aspects. Banking and Financial Services coverage. (i) financial leasing services including equipment leasing and hire-purchase; (iii) merchant banking services; (iv) Securities and foreign exchange (forex) broking, and purchase or sale of foreign currency, including money changing;

34 Banks / Credit Societies Key Service Tax aspects. Banking and Financial Services coverage. (v) asset management including portfolio management, all forms of fund management, pension fund management, custodial, depository and trust services, (vi) advisory and other auxiliary financial services including investment and portfolio research and advice, advice on mergers and acquisitions and advice on corporate restructuring and strategy;

35 Banks / Credit Societies Key Service Tax aspects. Banking and Financial Services coverage. (vii) provision and transfer of information and data processing; and (viii) banker to an issue services; and (ix) other financial services, namely, lending, issue of pay order, demand draft, cheque, letter of credit and bill of exchange, transfer of money including telegraphic transfer, mail transfer and electronic transfer, providing bank guarantee, overdraft facility, bill discounting facility, safe deposit locker, safe vaults, operation of bank accounts;

36 Banks / Credit Societies Key Service Tax aspects. Banking and Financial Services coverage. foreign exchange broking and purchase or sale of foreign currency, including money changing provided by a foreign exchange broker or an authorised dealer in foreign exchange or an authorised money changer, other than those covered under sub-clause (a);

37 Banks / Credit Societies Key Service Tax aspects. Banking and Financial Services Interest on loans / overdrafts / cash credits, discount on bill discounting is not taxable. Tax applicable only on interest portion in lease transactions and there too 90% of interest is exempt. Charges for collection of taxes to Central / State Govt. are exempted. No tax on bank to bank forex transactions.

38 Banks / Credit Societies Key Service Tax aspects. Brand Promotion Services. Typically cover transaction like charging brand for sending promotional material to clients / accountholders / Charging brand for advertised funding scheme for brand products. Business Auxiliary Services. Would typically cover current trend where banks get commission on sales / services secured through their network.

39 Banks / Credit Societies Key Service Tax aspects. Business Support Services. These would typically cover BPO like services of salary management. Credit Card Services. Self Explanatory Foreign Exchange Broker Services. Option to pay 0.1% on transaction value.

40 Banks / Credit Societies Key Service Tax aspects. Insurance Auxiliary Services. Life Insurance Auxiliary Services. These would cover charges for selling of insurance policies. NOTE INSURANCE COMPANY IS LIABLE TO PAY SERVICE TAX WHERE BANK ACTS AS AGENT AND BANK IS NOT LIABLE TO PAY SERVICE TAX ON AGENCY COMMISSION.

41 Housing Societies Service Tax Key Aspects. Builder Related Services. Construction of Residential Complex. Construction Services. Key issue is whether the society constructing building for members can be regarded as builder or service provider. My opinion NO. Mutuality clearly applies.

42 Housing Societies Service Tax Key Aspects. Brand Promotion Services. Cover transactions in recent trend where money is charged for brand promotional activities. Business Exhibition Services. Covers money charged for activities like Grahak Peth, if organised by society itself.

43 Housing Societies Service Tax Key Aspects. Club or Association Service. Key issue of mutuality would be still alive. Apart from that whether cost sharing amounts to rendering of service will be another question. Resident Welfare Association exempted for amounts upto Rs p.m. Are the owners of commercial premises or corporate owners of residential unit Residents?

44 Housing Societies Service Tax Key Aspects. Convention Services. Mandap Keeper Services. Pandal and Shamiyana Services. All these categories have slightly different hues but underlying key aspect is charging for temporary letting out for spaces like community halls, grounds, lawns etc.

45 Housing Societies Service Tax Key Aspects. Health Club Fitness Center Services. The charges for use of Gyms etc. are covered here. If use is restricted to members mutuality and cost sharing aspects can be still be argued. Hotel Accommodation Services. These will cover charges for guestrooms as per recent trends. If booking restricted to members then mutuality and cost sharing aspects can be still be argued. Exemption for charges of less than Rs PD 50% of the charges are exempted.

46 Housing Societies Service Tax Key Aspects. Management Maintenance and Repairs. Very risky definition covering all charges for maintenance as well as repairs. Exemption as available under club category not available here. Renting of Property Services. These will cover transactions like leave license of premises for Banks, Hoardings / Mobile Towers. Fully residential buildings may not be liable.

47 Specified Sectors Practical Issues. Identifying types of transactions that would entail VAT liability. Tracking threshold for getting registered in time. Having mechanism to club all taxable transactions for all the branches centrally. Mechanisms to calculate tax and VAT input credit in timely manner and to handle payments / returns /other filings in time.

48 Exceeding My Mandate As I have touched on the basic aspects of Indirect Taxes as applicable to cooperatives and aspects as applicable to two sectors in small detail, I just thought of exceeding the brief and also cover the aspect of the impact of these implications from Auditors point of view.

49 Auditors Perspective Indirect Tax implications. Should auditor verify the likely liability and suggest provisions or qualify the report? Answer at basic level is yes. But having identified basic amounts liable to tax it is recommended that Auditor should not sit in expert s role (even though he may be). It would be better to recommend obtaining of written opinion from third party expert and then proceed to cover the audit risk either via note or qualification as the case may be.

50 Thank You