By Jyotindra Mehta, President of Nafcub
Cooperative credit societies are supposed to provide facilities to their members in the same way as in the case of banks and therefore they accept deposits from members in cash and also refund cash deposits.
The society is also required to provide cash loans to its members to meet immediate needs. But pursuant to Section 269SS, no person, subject to certain exceptions, may accept loans or deposits of money other than by check or draft from the beneficiary of the account and in the same manner as Section 269T of the Income Tax Act. The deposit can only be refunded by check or draft. The applicability of sections 269SS and 269T is not only limited to single cash transactions of Rs.20,000/- but it even covers all cash transactions that exceed Rs.20,000/-.
Banks are exempt from Sections 269SS and 269T and therefore banks accept and refund cash deposits. But cooperative credit societies are not on the Sec’s list of exceptions. 269SS and 269T. Cooperative credit societies are subject to the control of the registrar of cooperatives and also subject to audit by an auditor appointed by the cooperative department of the state government. All members’ KYC documents must be obtained by the company and if the company is found guilty of accepting a deposit without KYC, a tax may be levied on that cash deposit u/s 68.
The intent of Sections 269SS and 269T is only to limit the practice of mirroring huge cash deposits found during search actions. Thus, the application of sections 269SS and 269T to cooperative credit societies is not consistent with the intent of the law.
It is therefore suggested that co-operative societies be treated the same as co-operative banks for this purpose and that co-operative credit societies be added to the exceptions provided for in item (b) of the first conditional clause of Section 269SS and the exceptions provided for in point (ii) of the second reservation in article 269T.
The cooperative society grants loans of more than 2 lacs to its members and the repayment of the loan is made by the members in cash, even through installments of less than 2 lacs and in all these situations a violation of Article 269ST occurs. Cash recovery from installment loans is essential for financial business, but due to Sec. 269ST makes it difficult for the credit society to do credit facility business with members.
It should be mentioned that cooperative banks are covered as an exception to article no. (i)(b) of the proviso of Section 269ST of the Income Tax Act, but cooperative societies are not included in the exceptions. Thus, the inclusion of the cooperative society with the cooperative banks should be made and eliminate undue hardship on the credit society by treating them on an equal footing with the cooperative banks.
Alternatively, the government can issue a notification as the government is empowered by article no. (iii) subject to s. 269ST and the government may exclude any class of persons from the applicability of the provisions of 269ST.
Also, in most cases of co-operative corporations, the GST liability arises from a very nominal amount on the collection of service charges from members, which is a meager sum. Since co-operative corporations have interest as the dominant income over these small charges, these corporations are required to charge GST only on these small charges. Note that interest income is classified as exempt supplies under entry no. 27 of Notification no. 12/2017- Central Tax (Rate). This notification prescribed the list of services exempt from GST.
Since interest is covered by the service notification exemption, no GST should be charged on such interest. However, since interest is defined as a “supply” covered by the scope of supply, the same is counted in the company’s annual turnover.
Now, since cooperative credit societies have mostly interest income and very minimal amounts of service charges etc. of their members, they are still required to obtain GST registration as their annual turnover including such interest (which is otherwise exempt as stated above) generally exceeds the prescribed amount of Rs. 40 .00 lakes. If the companies only have interest income of less than Rs. 40 lakhs, they are not required to register taking advantage of the Sec. 23(1)(a) of the CGST Act because it engages exclusively in the supply of services totally exempt from tax.
But due to the nominal amounts of member service fees (which are taxable) primarily in the nature of reimbursement or set-off, corporations are required to obtain GST registration pursuant to Sec. 22 and comply with all filing requirements for various returns under the GST Act. In the event of non-payment, heavy late fees and penalties are levied. It is therefore an undue hardship for society without any revenue for the government.
Thus, to remove this difficulty, the government can issue a notification under Art. 23(2) or alternatively, the government may consider issuing a notification to the United States. 9(3) and including the services of Co-op. credit company in the category of taxable services on which tax must be paid) on a reverse charge basis by the recipient of the service. This will relieve corporations of onerous GST obligations and the burden of paying GST will pass to the recipient of services whose amounts are very minimal.