Mutuality Principle Survives GST as Statute Cannot Override Constitutional Doctrine

Principle of mutuality under GST: Revisiting taxability of Member Welfare Contributions post ruling of division of bench of Kerala HC in Indian Medical Association Vs Union of India

Summary: The Kerala High Court’s Division Bench ruling in the IMA Kerala case has reignited the debate on the principle of mutuality under GST and the taxability of member welfare contributions. Historically, courts, including the Supreme Court in Bangalore Club and Calcutta Club, held that transactions between associations and members are not taxable because one cannot supply goods or services to oneself. Although Article 366(29A) introduced taxability for supply of goods by clubs to members, it did not extend to services. To counter this doctrine, Section 7(1)(aa) of the CGST Act was inserted retrospectively from 1 July 2017, deeming member-association transactions as “supplies.” However, the Kerala High Court ruled that Parliament cannot override constitutional principles through statutory fiction alone without a constitutional amendment. The Court declared Section 7(1)(aa) and related provisions unconstitutional insofar as they sought to tax member-centric welfare activities, thereby restoring significance to the doctrine of mutuality under GST.

Background:

• The doctrine of mutuality is a long discussed concept in Indian tax jurisprudence, founded on the premise that a person cannot transact with or provide a supply to oneself. In this context, the taxability of the transactions between the associations and its members have always been subject to litigation.
• In practice, associations or welfare funds are formed, including within corporate organizations, predominantly for the exclusive welfare of the contributors, through the pooling of their contributions.
• The taxability has been addressed and settled in line with ‘principle of mutuality’ by various judicial forums during the pre-GST regime including the Supreme Court in case of CIT v. Bangalore Club (2013) and State of West Bengal v. Calcutta Club Ltd. (2019), specifically in cases where the association exists only as a collective instrument of its members and does not carry an independent commercial character.
• However, under the Goods and Services Tax (“GST”), this settled understanding appears to be unsettled, especially with the insertion of Section 7(1)(aa) into the Central Goods and Services Tax Act, 2017 (“CGST Act”), operationalised from 01.01.2022 with retrospective effect from 1.07.2017, deeming activities between associations and their members to be “supplies”.
• In this respect, the recent ruling of divisional bench of Keral High Court in case of Indian Medical Association (IMA)[1] warrants attention.

Pre‑GST position and Constitution (46th Amendment) Act, 1982:

• The parliament enacted the Constitution (46th Amendment) Act, 1982, introducing Article 366(29A)(e). providing that the supply of goods by an unincorporated association to its members as a sale for sales tax purposes.
• It may be noted that the deeming fiction was limited to goods, not services
• The Supreme Court in CIT v. Bangalore Club (2013)[2] and State of West Bengal v. Calcutta Club Ltd. (2019)[3] ruled that the transactions between a club and its members lack the essential plurality of persons required for a taxable event.
• It is pertinently be noted that the Hon’ble Apex Court in case of Calcutta Club held that, the doctrine of mutuality survived even the 46th Constitutional Amendment, except to the limited extent of transactions expressly deemed as “sales” under Article 366(29A), i.e., goods.

GST Framework and the Insertion of Section 7(1)(aa):

• Under GST, Section 7(1)(aa) was introduced vide Finance Act 2021, intending to legislatively override the doctrine of mutuality and deeming that the activities or transactions between an association and its members to be “supply”.
• The amendment was explicitly given retrospective effect from 1 July 2017, triggering widespread litigation, particularly in cases involving:
• Welfare and social security scheme contributions; and
• Participatory funds pooled for member benefits, where there may not be commercial elements present.

Conflicting Advance Rulings and Practical Uncertainty:

• Under GST, several AARs examined the taxability of members’ contributions under GST, by strictly applying Section 7(1)(aa), without delving into the constitutional validity of the same as the advance ruling authorities are not empowered to examine vires of legislation.
• Consequently, various AARs have upheld the taxability of contributions made by the members in line with Section 7(1)(aa) of the CGST Act 2017

Ruling of Kerala High Court (Division Bench): IMA Kerala Case:

• The Indian Medical Association (Kerala State Branch) runs multiple welfare and mutual benefit schemes funded entirely by contributions from its members. The GST authorities sought to tax these contributions by invoking Section 7(1)(aa).

The Division Bench of Kerala High observed that:

• When a word or concept in the Constitution has been judicially interpreted by the Supreme Court, the legislature cannot assign it a contrary meaning by statute.
• The Court contrasted the GST amendments with the 46th Constitutional Amendment, noting that in earlier regimes, the constitution was amended to include the taxability of goods, whereas the amendment made in Finance Act 2021 to include ‘services’ within scope of supply is a mere statutory explanations and not constitutional change.

Even after inserting Section 7(1)(aa), the definition of “service” remains unchanged, thereby making it impermissible to levy GST on member‑centric welfare activities.

Accordingly, the High Court has declared Section 7(1)(aa) and the connected amendments to Section 2(17)(e) as unconstitutional;

Conclusion:

• The IMA Kerala judgment underscores a critical constitutional principle: taxing power flows from the Constitution, not the statute book alone.
• While Section 7(1)(aa) sought to legislatively negate mutuality, the Kerala High Court has reaffirmed that constitutional concepts cannot be diluted by legal fiction.
• While the decision is binding within territorial jurisdiction, it however carries a strong persuasive value. Accordingly, revisiting the taxability and litigation positions is warranted.

The views expressed are strictly personal and do not represent or relate to any organization.

[1] 2025 (4) TMI 872

[2] 2013 (1) TMI 343

[3] 2019 (10) TMI 160