A Brief Insight Into Everything You Need To Know About Maintenance Charges

Various facets of Maintenance Charges in a

Resident Welfare Association

Introduction

 Resident Welfare Association (RWA)

RWA is a body that represents the common interest of individuals living in a community, a society or in an apartment premises. The Association is responsible for managing day-to-day affairs, inter alia, maintenance of common area, resolving problems of the residents, organizing events, managing facilities in the apartment complex, safeguarding the rights of the unit holders etc.

Maintenance Charges

“All good things come with a price” Maintenance Charges are precisely that, the price you pay for all the at reach facilities you get by living in an apartment or a society. In reality, the price you pay for your apartment is not merely for the house alone, but a major portion is influenced by the amenities or facilities that the apartment complex provides.  In other words, these amenities are the USP for a project or to a builder. In order to maintain these amenities/facilities in a good and safe condition for a lifetime, a certain amount is collected every month from the owners/residents. This amount is called the “Maintenance Charge”.

Who can collect Maintenance charges?

A registered Association represented by the elected office bearers are empowered to collect maintenance charges on behalf of the Association.

Collection Of Maintenance Charges:

KSR Act, 1960 Versus KAO Act, 1972

Karnataka Societies Registration Act, 1960 (KSR Act, 1960)

It is well known that registration of RWAs in the city of Bengaluru under the KSR Act 1960 is more prevalent despite there being a specific Act for RWAs; the Karnataka Apartment Ownership Act, 1972.

Speaking of collection of maintenance charges by a RWA registered under the KSR Act, 1960, the Hon’ble High Court of Karnataka vide its Order dated 06.11.2019 in the case of VDB Celadon Apartment Owners’ Association, has held that the Apartment Owners forming a Society under the KSR Act 1960 with an object to maintain and manage residential complexes, cannot do so. The Court has further observed that Section 3 of KSR Act, 1960 which deals with the valid objects for formation of a Society, does not provide for the objects of RWAs to collect and maintain the apartment complex or its amenities.

There are instances where Associations collect maintenance charges under the name of “Contribution”. It is pertinent to note that a mere change in nomenclature would not change the objective, nature or purpose of such collection of money. Therefore, whether it is maintenance charges or contribution, the Hon’ble High Court has held that such collection of money by RWAs registered under the KSR Act, 1960 is not permissible.

[Refer case VDB Celadon Apartment Owners Association V. Mr.  Praveen Prakash & Ors]

What is the way forward?

Karnataka Apartment Owners Act, 1972 (KAO Act, 1972)

The 1972 Act and the Rules specifically cater to the needs of the Apartment owners including maintenance of common areas etc.

Under the said Act & Rules, the homeowner acquires absolute ownership with a clear title of both the apartment and the proportional Undivided Share (UDS). The Act & Rules also provide, inter alia, duties of office bearers, the process of voting, charges, and encumbrances against each apartment. It further provides the steps to be taken in case of demolition or destruction due to a natural disaster etc.

That being said, it is a common practice among the builders or developers to include a clause in the sale deed creating a contractual obligation on the apartment owners that they shall become members of the Association under the KAO Act, 1972; in such a situation, the apartment owners shall form an Association under the said Act upon registration of the Deed of Declaration. However, even if such a clause does not form part of the final sale deed, the apartment owners may still register the deed of declaration and the Association under the KAO Act, 1972.

In this regard, the Hon’ble High Court in the case of VDB Celadon Apartment Owners’ Association has observed that the main object of a RWA is to maintain the apartment complex, its amenities etc. Such objects are specifically provided for in the provisions of the KAO Act, 1972 and therefore, a RWA registered under the 1972 Act is empowered to collect maintenance charges and thereby discharge its objects, inter alia, maintaining the apartment complex and its amenities.

In view of the foregoing discussions, it can be said that the Hon’ble High Court vide its Order dated 06.11.2019; in the case of VDB Celadon Apartment Owners’ Association has put to rest the long standing debate on whether a RWA must be registered under KSR Act, 1960 or KAO Act, 1972; by categorically stating that registration under KSR Act, 1960 is not permissible inasmuch as the objects of a RWA draws its power to collect maintenance charges by the provisions of KAO Act, 1972 and therefore having regard to the legal precedent, the Associations must contemplate registration under the 1972 Act.

Non-payment of Maintenance charges

Having understood which Act empowers the RWA to collect maintenance charges, let us now delve into situations of non-payment of charges

Defaulting Members:

Maintenance Charges are either a fixed rate per square foot or a fixed charge per unit depending on the bye-laws of an Association.  Most likely than not, Associations encounter situations where members fail to pay the maintenance charges. Such members who default in discharging their duty of paying the maintenance charges are called the “defaulting members”

Defaulting member and Association:

The Do’s and Dont’s

The Constitution of our nation guarantees certain basic rights to every individual known as the fundamental right under Article 21. No person under any circumstance shall withhold or prevent anyone from exercising his/her fundamental rights. Any attempt to do so would result in clear infringement of fundamental rights.

The bye-laws of an Association shall not comprise of clauses that do not chime with the spirit of Article 21, the rules or the bye-laws shall not be unreasonable, arbitrary or infringing one’s fundamental rights or such other right as maybe bestowed by any other Statute. Such infringements are not well received by any Court of Law and shall have legal consequences.

Now, let us take a quick look at some of the actions against a defaulting member by an Association that may amount to infringement of one’s fundamental rights; including but not limited to:

1. Refusing entry to the Apartment complex;

2. Withholding the supply of electricity;

3. Withholding the supply of water;

4. Restraining from renting the apartment;

5. Restraining from having guests/visitors;

6. Refusing to allow vehicle parking in the allotted slot; and etc.

What Can Associations do instead?

  • At the outset, the Association must serve a regular notice to the defaulting member in writing for payment of dues. If the defaulting member does not heed to such a notice from the Association, then the Association must reach out for legal help.
  • A legal notice must be served on the defaulting member specifically mentioning the amount of due, period of due, penalty or interest if any and put the defaulting member on notice to pay up the dues or face consequential legal action.
  • As a next step, the Association must file a civil suit for recovery of dues and penalties, if any before the jurisdiction Civil Court. The Associations shall not take the law into their hands and make such other rules in the bye-laws deviating from the legal procedures.

The Courts have echoed the above in a catena of cases, including the recent Order by the City Civil Court, Bengaluru vide its Order dated 05.02.2020 in the case of M/s Aquila Heights Apartment Owners Association.  It was observed by the Court that the Apartment Associations through its office bearers cannot take the law into its own hands and make such rules or do such acts that infringe the fundamental rights of a resident.

[Refer case Subbaramaiah and Smt. Beena Kumari V. M/s Aquila Heights Apartment Owners Association]

Thus, the Association or its office bearers are legally bound to abide by the law of land as much as the members are bound to abide by their duties and be prompt in payment of their fair share of maintenance charges.

Having dealt with various facets of maintenance charges spanning from who can collect to what to do in case of non-payment, let us now look at the final aspect of maintenance charges, that is the taxation part of it.

Maintenance Charges and GST:

A Brief Insight

Introduction

What is GST?

Goods and Services Tax (GST) is an indirect tax on the supply of goods and services. It is a comprehensive, multistage, destination-based tax: comprehensive because it has subsumed almost all the indirect taxes except a few state taxes.

Applicability:

Section 9 of the CGST Act, 2017 prescribes that GST is levied on supply of goods or services.  The taxable event and essential requirement under GST is “supply”.  Thus, the services provided by RWAs to its members shall be treated as supply of service and therefore liable to GST.

Threshold limit for Registration

Section 22 of the CGST Act, 2017 prescribes that a supplier of service/s is required to avail GST registration if the aggregate turnover in the previous financial year exceeds Rs 20 lakhs.  Accordingly, if the aggregate turnover of a RWA exceeds Rs 20 lakhs, it shall mandatorily avail registration, discharge its tax liability and comply with GST regulations and other statutory compliance as per the provisions of GST Act and Rules there under.

GST on Maintenance Charges

GST on maintenance charges collected by a RWA from residents is exempt 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.   Further, in a case where a person who owns two or more residential units in a residential complex, such person shall normally be a member of the RWA for each residential unit owned by him/her separately.  The ceiling of Rs. 7500/- per month per member is applied separately for each residential unit owned by him/her.

Illustration:

If the maintenance charges are Rs. 9,000/- per month per member, and GST is applicable @ 18%

Solution:   Then GST shall be payable on the entire amount of Rs.9, 000/- and not on Rs 1,500/- (9,000 – 7500)

[Refer Circular No. 109/28/2019- GST dated 22-07-2019]
[Refer clause (p) to the notification No. 2/2018- Central Tax (Rate) dated 25.01.2018]

The electricity charges paid to BESCOM for power consumed towards common facilities and separately recovered from members is liable to GST as consideration received is for the supply of maintenance services to the members

[Refer M/s Prestige South Ridge Apartment Owners’ Association – GST AAR Karnataka]

However, if Association collects electricity charges of Individual units and pay it on behalf of the owner, it is a pure agency transaction and the same shall be excluded to compute the limit of Rs 7500/-.

Note:

If any RWA is collecting Maintenance charges in advance for the entire year, GST liability arises and has to be discharged at the time of receipt of maintenance charges only.  This leads to immediate cash outflow on account of GST liability and moreover, RWA will not be able to adjust eligible Input tax credit of the remaining months towards Output GST.

In order to avoid such cash outflow, RWA should account the advance maintenance charges received at the beginning of the year as Deposit collected from members and respective monthly maintenance charges are to be adjusted every month against the deposit and raise invoice on a monthly basis.

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