Club class discrimination in tax

Law is experience developed by reason and applied continually to further experience, said Roscoe Pound. The Central Board of Excise and Customs has followed this is in letter and spirit regarding the service tax law.

The doctrine of "applying continually" has been happening year-on-year and 2005 was no different. However, this column would be restricted to the levy on membership fees of a club or association and the other main provisions on this law announced in the Budget.

At first blush, the decision to levy the tax on membership fees appears to be a mistake, both from the income-tax department's point of view as well as that of the taxpayers'.

Not only would the grant of a membership not amount to providing a taxable service, but the revenue from service tax would rise tsunamically if one were to tax the services other than membership provided by a club or an association.

In a typical situation, if the annual membership of a club is Rs 5,000, service tax would be Rs 510. If other services like entertainment, lunch and dinner etc cost Rs 10,000 per annum, service tax would amount to Rs 1,020. Whether the grant of a membership could tantamount to providing a service is an issue that is certain to be challenged in the courts.

A club or an association has been defined to mean any person or body of persons providing services, facilities or advantages, for a subscription or any other amount, to its members but does not include:

Any body established or constituted by or under any law for the time being in force;

Any person or body of persons engaged in any activity having objectives which are in the nature of public service and are of a charitable, religious or political nature;

Any person or body of persons engaged in the activities of trade unions, promotion of agriculture, horticulture or animal husbandry;

Any person or body of persons associated with the press or media.

The first limb would exempt professional institutes such as the Institute of Chartered Accountants of India, etc. from the tax net while the second would take away trusts and chambers of commerce.

The third criteria would give protection to trade unions while the fourth exempts organisations like Press Club of India. What we have left are the private clubs and associations, etc. Most of these clubs could have registered themselves as outdoor caterers or mandap keepers which would make the proposed measure revenue-neutral.

Among other measures, the proposal to introduce the long-pending threshold exemption limit is most welcome. It is going to be difficult for high-tax assesses to pay service tax before the 5th of every month, since they need to align their Central Excise Records too in view of the Cenvat Credit Rules 2004.

The proposal to include payments received before, during and after providing the service in the definition of the term "gross value" is bound to raise some concern, since it would amount to paying a service tax on an advance payment which the legislation may not have intended.

How a residential complex with 12 or more apartments amounts to providing a service, while one with 10 apartments does not amount to providing a service is something that defies logic. It is to clear such doubts that the necessity has arisen for a separate Act or a code for service tax with a crystal-clear definition of services.