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#GSTCase-163- Taxability of Donations received by Charitable Institution to meet the deficit/financial losses towards running a hostel

Case-Students’ Welfare Association [2019] 103 taxmann.com 449 (AAR – MAHARASHTRA)

1. Facts-

Students Welfare Association (SWA) is 63 years old registered charitable Trust having Section 12AA & 80-G certificate of exemption under Income-tax Act, 1961, since 1973. Trust activity, is exclusively connected with students and education. Under the GST Act, not a registered person. Applicant offers lodging and boarding facilities besides compulsory personality development training which includes computer awareness activities besides developing skills to operate the computers, training for development of communication skills in English and other foreign languages for a consolidated fee of Rs.22,250/- (Rupees twenty two thousand two hundred and fifty only with no option to choose the activities such as only lodging or only boarding or only training, etc.

2. Query

Query 1: Whether hostel accommodation provided by Trusts to students is covered within the definition of Charitable Activities and thus, exempt under Sl. No. 1 of Notification No.12/2017-CT (Rate)?

Query 2: Whether different treatment would be required for use of hostel rooms given by us for residential purposes but ultimately been used by the hirer for commercial use?

Query 3: Whether the said notification would be applicable if the accommodation if decided to be given for commercial purposes in future whether the activity still would be able to enjoy exemption under said notification?

Question 4: Whether the large donations given by the donors would be treated as ‘service and taxed accordingly and whether only sponsored donations are believed to be covered under said mega exemption notification?

3. Contention of the Applicant

The trust meets its expenses by charging nominal fee to the students and from donations collected from public. The activity carried by the trust is bound to result into incurring financial losses. The recoupment of these sums of expenditure which causes financial loss to the trust is made good out through donations.

It is the submission of applicant that activities are covered by the expression ‘Charitable activities’ as defined in the notification under the GST law and therefore exempt from the levy of tax.

4. Held

Query 1: Whether hostel accommodation provided by Trusts to students is covered within the definition of Charitable Activities and thus, exempt under Sl. No. 1 of Notification No.12/2017-CT (Rate)?

Held: AAR relying upon Circular No. 32/06/2018-GST, dated 12th February, 2018 held that Hostel accommodation services do not fall within the ambit of charitable activities as defined in para 2(r) of Notification No. 12/2017-CT (Rate).

Query 2: Whether different treatment would be required for use of hostel rooms given by us for residential purposes but ultimately been used by the hirer for commercial use?

Held: It has bene submitted by applicant that during vacation period hostel is offered for residential purpose and hired for labourers of a commercial organization.

Entry at Sr. No. 14 of Notification No. 12/2017 (Before Amendment vide Notification No. 20/2019-Central Tax (Rate) Dated 30th September 2019)

Services by a hotel, inn, guest house, club or campsite, by whatever name called, for residential or lodging purposes, having declared tariff of a unit of accommodation below one thousand rupees per day or equivalent.

It was observed by AAR that description of service is use based, meaning that if the accommodation is used for residential or lodging purpose then it is immaterial who the user is. Vide Circular No. 32/06/2018-GST, dated 12th February, 2018, distinction between services by a hotel, inn guest house club or campsite, by whatever name called, for residential or lodging purposes and Hostel accommodation services is done away.

The services provided by such hostel, for residential and lodging purposes would be covered by the scope of notification entry where the declared tariff of a unit of an accommodation is below one thousand rupees per day. Therefore, the scope of entry is restricted to use of the accommodation unit for residential and lodging purpose.

Query 3: Whether the said notification would be applicable if the accommodation if decided to be given for commercial purposes in future whether the activity still would be able to enjoy exemption under said notification?

Held:  The scope of exemption entry 14 of the Notification 12/2017 which is applicable to accommodation unit when used only for residential or lodging purpose. Therefore, if the unit is used for residential or lodging purposes, irrespective of who the user is, then in such case, exemption would be available. However, if the unit is used for purposes other than residential or lodging, then exemption under the said entry would not be available.

Question 4: Whether the large donations given by the donors would be treated as ‘service and taxed accordingly and whether only sponsored donations are believed to be covered under said mega exemption notification?

Held: SWA is not a commercial hostel or commercial organization and thus meets its expenses by charging nominal fees to the students. They further meet the expenses form donations collected from public. It is this donation subject matter of this question. As per the contention of applicant donations received by them would not be chargeable to GST. The issue before AAR thus was whether consideration received by applicant in the form of public donation is towards any supply and chargeable to GST.

AAR referred to the concept of income by a charitable Trusts from donations collected from the public explained by Board vide GST Flyers dated 01/01/2018 at Sr. 39:

“Income from a religious ceremony organized by a charitable trust exempt as per the above notification. So the income from Navratri Functions, other religious junctions, and religious poojas conducted on special occasion like religious festivals by persons so authorized for this purpose by the charitable or religious trust are exempt from GST. But a careful perusal of this exemption shows that all income from such a religious ceremony is not exempt (services other than by way of conduct of religious ceremony are not exempt). Therefore the nature of income is an essential factor by ascertaining whether it will be taxable or exempt, the nature of income loses its religious nature, it is definitely chargeable.

For example, if with regard to Ganeshotsav or other religious functions, charitable trusts rent out their space to agencies for advertisement hoardings, income from such advertisement is chargeable to GST, as this will be considered as income from the advertisement services. Further, if donation for religious ceremony is received with specific to GST. But is donation for religious ceremony is received without such instructions, it may not be subjects to GST.”

AAR observed that principle emerging from the above is equally applicable to the case at hand and that if the income is in nature of donation received without any instructions, then it would not be subject to GST.

In view of the above guideline, it was concluded that donations received without any instruction would not be taxable however where the donor is clearly receiving identifiable benefits in return either in terms of advertising or publicity, the said donation amount received is to be treated as a consideration for supply of goods or services or both and liable to GST.

5. Comment

The above ruling is a significant ruling terms of taxability of the donations received by a charitable organisation. There are few other clarifications issued in respect of taxability of donations in GST Regime as well as pre-GST Regime. Two such clarifications are as follows:

a) Education Guide 2012-Some Examples of “Consideration”-Vis-à-vis-Donation

b) Donations to a charitable organization are not consideration unless charity is obligated to provide something in return e.g. display or advertise the name of the donor in a specified manner or such that it gives a desired advantage to the donor.

c) Conditions in a grant stipulating merely proper usage of funds and furnishing of account also will not result in making it a provision of service.

d) Activity carried out without any consideration like donations, gifts or free charities are therefore outside the ambit of service.

e) Circular No. 116/35/2019-GST [F.NO. 354/136/2019-TRU], Dated 11-10-2019

The Circular sought to clarify the issue whether GST is applicable on donations or gifts received from individual donors by charitable organizations which is acknowledged by them by placing name plates in the name of the individual donor.

Circular then referred to some examples of cases where there would be no taxable supply are as follows:—

(a) “Good wishes from Mr. Rajesh” printed underneath a digital blackboard donated by Mr. Rajesh to a charitable Yoga institution.

(b) “Donated by Smt. Malati Devi in the memory of her father” written on the door or floor of a room or any part of a temple complex which was constructed from such donation. It was finally clarified vide circular that in each of these examples, it may be noticed that there is no reference or mention of any business activity of the donor which otherwise would have got advertised. Thus, where all the three conditions are satisfied namely the gift or donation is made to a charitable organization, the payment has the character of gift or donation and the purpose is philanthropic (i.e. it leads to no commercial gain) and not advertisement, GST is not leviable.