GST applicability on member’s clubs
There are lot of debates still going on relating to applicability of GST on member’s club in the context of Supreme Court larger bench decision [landmark decision] in the case of State of West Bengal & Ors. Vs Calcutta Club Limited [Civil Appeal No. 4184 of 2009] and State of West Bengal & Ors. Vs Calcutta Club Limited [ Civil Appeal No. 4184 of 2009].
In this article, I have jotted down certain provisions of the constitution, my understanding of the judgement, comparable provisions of the Income-tax Act and the arguments favour and against member’s club on applicability of GST.
Sequence of discussion:
A. Certain provisions of the Indian Constitution (which provides some context for interpretation)
B. Principle of mutuality
C. Discussion on the Judgement
D. Comparable provisions under the Income-tax law
E. Relevant provisions under the GST law
F. Taxability under GST regime
A) Certain provisions of the Constitution:
1. India being a federal state there is a necessity for distribution of legislative power between the union and the states.
(i) Schedule VII of the Indian Constitution contain 3 parts (List I – Union list; List II – State list; and List III -Concurrent list.
Given below some of the entries provided in the list :
| List I : Union List | List II : State List |
| Entry 82: Taxes on income other than agricultural income | Entry 44: Taxes on agricultural income |
| Entry 85: Corporation tax | Entry 54: Taxes on the sale or purchase of goods other than newspaper, subject to the provisions of entry 92A of List I [Before 101st Amendment]
Taxes on the sale of petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas, aviation turbine fuel and alcoholic liquor for human consumption, but not including sale in the course of inter-State trade or commerce or sale in the course of international trade or commerce of such goods [After 101st Amendment] |
| Entry 86: Taxes on the capital value of the assets, exclusive of agricultural land, of individual and companies; taxes on capital of companies. | |
| Entry 92A: Taxes on sale or purchase of goods other than newspaper, where such sale or purchase takes place in the course of inter-state trade or commerce. | |
| Entry 92B: Taxes on the consignments of goods (whether the consignment is to the person making it or to any other person), where such consignment takes place in the course of inter-State trade or commerce. | |
| Entry 97 : Any other matters not in the list II or list III including any tax not mentioned in either of those lists [Residual entry] |
(ii) Article 246(1) provides – Parliament has exclusive power to make laws with respect to the matters enumerated in the union list.
Article 246(2) provides – Parliament and state legislatures has the power to make laws enumerated in the concurrent list.
Article 246(3) – State legislatures has exclusive power to make laws in respect of matters enumerated in the state list. However, there are certain exceptions.
Article 248: Parliament has exclusive power to make laws with respect to any matter not enumerated in concurrent list or state list.
(iii) The list provided in the Schedule VII is not a source of power, it is an allocation of power. It is pertinent to note the decision of Supreme court in the case of State of Andhra Pradesh vs National Thermal Power Corporation Limited AIR 2002 SC 1895, held that the entries in three list of Seventh Schedule are only legislative heads or fields of legislation and not source of legislative empowerment. They do not confer any legislative competence of the Parliament and legislatures. The competence to legislate has to be traced from the provisions of the Constitution.
(iv) Article 246A reads as follows: [Amendment relating to GST]
(1) Notwithstanding anything contained in articles 246 and 254, Parliament, and, subject to clause (2), the Legislature of every State, have power to make laws with respect to goods and services tax imposed by the Union or by such State.
(2) Parliament has exclusive power to make laws with respect to goods and services tax where the supply of goods, or of services, or both takes place in the course of inter-State trade or commerce.
(Emphasis supplied)
Article 246A overrides Article 246, wherein it provides that both Parliament and State legislature has equal power to legislate goods and service tax when it is of intra-state nature [CGST and SGST] and it also provides exclusive power to the Parliament to legislate goods and service tax when it is of inter-state nature[IGST].
2. Article 265 of the Indian Constitution provides, “no tax shall be levied or collected except by authority of law.” In other words, there should be valid law in place to tax.
3. Article 13(2) provides that “the state shall not make any law which takes away or abridges the fundamental rights and any law made in contravention of this clause shall, to the extent of contravention to be void.” Here the State shall not mean only State Government. It Includes the Government and Parliament of India and the Government and the legislature of each of the states and all local or other authorities within the territory of India or under the control of the Government of India [Article 12].
Article 246 read with 248 (including Article 246A) gives enormous power to the legislators to legislate laws, however, the law made shall not infringe/ violate the fundamental rights [given in Part III of Indian constitution (runs from Article 12 to Article 35)] of the people.
It is also pertinent to note that the fundamental rights vested on the citizens of India are not absolute rights but are restricted rights.
4. According to Article 141 of the Indian constitution, the law declared by the Supreme court shall be binding on all courts within the territory of India” [Binding precedent]. Two concepts were evolved in this context:
(i) Ratio decidendi – The reasons of the decision not only bind the concerned parties but also forms as law to future generations.
(ii) Obiter dicta – “Something said by the way”, which does not form part of the rationale of the decision. The same is binding only on the parties and do not amount to law and hence not binding on the future generations.
5. Some of the relevant definitions provided in the Indian Constitution:
Article 366. Definitions – In this constitution, unless the context otherwise requires, the following expressions have the meanings hereby respectively assigned to them, that is to say –
(12) “goods” includes all materials, commodities, and Articles
(26A) “service” anything other than goods
(29-A) “tax on the sale or purchase of goods” – Discussed in the later part of the article.
B) Principle of Mutuality:
- There must be complete identity between the class of participators and class of contributors. Contribution of funds for a common purpose.
- The Particular label or form by which the mutual association is known or is of no consequence.
- Certain members only of the association take advantage of the facilities which it offers does not affect the mutuality of the enterprise.
- The participation envisaged in the principles of mutuality is not that the members should take the surplus to themselves. It is enough if they have a right of disposal over the surplus.
- The Income/ surplus of which is governed by the principle of mutuality are not liable to Income-tax.
- The club can be broadly categorised into – (i) Member’s Club – owners and members are one and the same ;(ii) Proprietary club – Owner of the club would not be member’s themselves, but somebody else. Member’s club would satisfy mutuality test.
C) Case law:
The larger bench decision which is based on the reference order of the divisional bench, is divided into two parts:
Part A: Tax on sale of goods by club to its members
Part B : Tax on services by club to its members
Part A: Tax on sale of goods by Club to its members [State of West Bengal & Ors. vs Calcutta Club Limited]
1. Facts:
- Club is an incorporated entity under the companies Act, 1956.
- Club charges and pays sales tax when it sells foods and drinks to the non- members/ guests who accompany the permanent members.
- In the Invoices raised in the name of permanent members for sales of foods and drinks, no sales tax is charged/ collected.
2. Decisions at various forum (except Supreme Court, discussed in the latter part of the article):
- The members and the supplier (club) are one and the same person. The payment made by the permanent members are not consideration in the real terms.
- The drinks and beverages are purchased from the market by the club as an agent of the members.
- The members collectively were the real life and the club was a super structure only.
- Just because of presentation of bills and removing the membership of the club due to non-payment there-of, does not bring within the net of sales tax.
3. Supreme Court decision in case of CIT vs. Young Men’s Indian Association [1970 decision] – Constitution Bench decision – Six Judge bench:
(it is relevant to discuss this case before proceeding to the questions placed before the larger bench and the decision pronounced by the apex court).
Query:
Whether supply of refreshment by a club to its members attract sales tax?
[There were three appeals involved in this case – (i) the club registered under the Companies Act (section 25 Company)’; (ii) the club registered under Society Registration Act, 1860; and (iii) a trust formed through trust deed].
Decision:
- In order to constitute a sale, there should be two persons involved in a transaction. [The court has referred the definition of sale under the Sales of goods Act, 1930.]
- If there is no transfer of property from one person to another person, there is no sale.
- The club even though distinct legal entity is only acting as an agent for its members, hence the element of sale is completely absent. Therefore, the club is not subject to sale tax.
a) This decision is expressly based on the English judgements which disregarded the corporate form which has made no distinction between the club in incorporated form and club by way of a registered society or incorporated by a deed of trust.
b) The essence of the judgement is-
(i) The holding of property must be holding for and on behalf of members of the club, there being no transfer of property from one person to another (to fall under the principle of mutuality).
(ii) The above is not applicable to proprietary club, since the owner of the club would not be the members themselves, but somebody else.
4. Divisional bench sets following three questions to be answered by the larger bench:
(i)Whether the doctrine of mutuality is still applicable to the incorporated clubs or any club after 46th Amendment to the constitution?
(ii) Whether the judgement in the case of Young men’s India Association still holds good?
(iii) Whether the 46th Amendment to the constitution by deeming provisions provides that the provision of foods & beverages by the incorporated clubs to its permanent members constitute sale thereby holding the same to be liable to sales tax?
5. Larger bench observations:
- There was an amendment (called 46th amendment) made by the parliament (by exercising the power vested by the constitution under article 368) in the year 1982, by inserting clause 29-A in the Article 366.
- Before proceeding to the observations, one need to understand why there is a necessity to amend the constitution in addition to the amendment made (to be made) in the relevant state sales tax act. This understanding is relevant for expressing view on the applicability of GST on clubs.
- Let me take an example section 56(2)(x) of the Income-tax Act, 1961 which was amended recently. There was an amendment made in the Income-tax Act, 1961 but there is no specific amendment made in the Constitution. Why the same analogy should not extend to the state sales tax Act also?
- As discussed earlier there are three lists provided in the VIIth Schedule to the Constitution. Entry no. 97 of the Schedule VII read with Article 248 gives enormous power to the Parliament to legislate law on any subject unless the matter is already listed in List II and List III. Such kind of power is not vested with the state legislature.
- Accordingly, the state legislature cannot include any other manner not provided in the state list or concurrent list by way of deeming provision in the state Act. The same is not the case for the Parliament, it can include anything for the matter unless those items are listed in the state list. Say for example 56(2)(x) was included under the definition of Income under section 2(24) of the Income-tax by virtue of entry no.97 (of schedule VII) read with Article 248 of the Constitution. Hence, there is a need of amendment in the constitution before making amendment in the respective state tax laws.
- The Apex court in this case inter-alia made the following observations:
5.1 61st Law commission Report
- Before the amendment made in the Article 366, there was a report made by the law Commission of India. The report has highlighted the observation made by the courts in various cases. It also highlighted the legal principles set -out in the club cases:
The supply and distribution by unincorporated society, club, firm, or an association, of goods to the members for payment of price may not result in a sale. Because those entities hold the goods on benefit of all the members. However, it will get transfer to a particular member not because of sale but by virtue of relinquishment of rights by other members in relation to goods, for the payment of price by the concerned member. In other words, release of the rights of the other members to the purchaser.
Since, this is the then present position, whether it is desirable to expand the concept of “sale” to provide the legislative power to the state? (Recommendation of Law Commission)
- Amendment to the constitution are not needed for the following reasons:
(i) Clubs and association are not large.
(ii) Taxation of such transactions would discourage the co-operative movement.
(iii) No series question of evasion arises (as a member really takes his own goods)
Hence, we therefore do not recommend any change.
Despite the above, Article 366(29-A) included within its sub-clause (e).
5.2 Statement of object and reasons which led to 46th Amendment:
- The interpretation of entries in the legislative lists, would be given a wider connotation. To be regarded as a sale (under the Sales of Goods Act), the following ingredients shall be present:
√ Parties competent to the contract
√ Mutual assent
√ Transfer of property in goods from one party to another party
√ Price
- This position has resulted in scope of avoidance of tax in various ways:
- While sale by a registered club or association of person to its members is taxable; sales by unincorporated club or association of persons to its members is not taxable as such club or association, in law, has no separate existence from that of the members.
- (The statement also referred Young men’s India’s Association case)
- In the Associated Hotels of India case, the supreme court held that there is no sale involved in the supply of food or drinks by a hotelier to a person lodged in the hotel.
- The amendment introduced fiction by which six instances of transactions were treated as deemed sale of goods, and the said definition as to deemed sale will have to be read in every provision of the constitution wherever the phrase “tax on sale or purchase of goods occurs”.
It is pertinent to note that the statement of the object and the reasons of the amendment are drafted based on the presumption that the incorporated clubs/ association are always taxable.
5.3 Article 366(29-A) of Indian Constitution
Article 366 (29-A) of Indian Constitution defines Tax on sale of goods includes –
a) —
e) Tax on supply of goods by any unincorporated association or Body of Persons to a member thereof for cash, deferred payment, or valuable consideration.
f) Tax on the supply by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), were such supply or service, is for cash, deferred payment or other valuable consideration, and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made.
(emphasis supplied)
It is pertinent to note the following:
- Clause (e) refers unincorporated association or Body of Persons and not incorporated association or person.
- The definition provided here is the deemed sales (tax on sale of goods) and not the deemed goods or services.
5.4 West Bengal Sales Act:
- Charging section 9 – provides tax on sale – Every dealer shall be liable to pay tax on sales subject to conditions and limitation provided therein.
- Section 2(30) of the West Bengal Sales Tax Act defines Sales means transfer of property in goods and includes …… [the 6 transactions provided under Article 366(29-A) of the Constitution].
- Section 2(10) of the West Bengal Sales Tax Act defines dealer means who carries on business of selling or purchasing goods in West Bengal or any person making sales under section 15.
Explanation 1 : Co-operative society/ club/ any association which sell goods to its members is a dealer.
- Section 2(5) of the West Bengal Sales Tax Act provides business includes:
– Trade, commerce, manufacture etc.,
– Whether it has been carried out with profit motive or not
– Whether any profit accrues on such trade, commerce, manufacture etc.,
– Any transaction which is in connection with the above activities
6. Rationale for decision:
- On reading the objects and reasons for the amendments, it appears Young men’s Indian association club has not read in correct perspective. They thought that incorporated associations are taxable whereas unincorporated associations/ clubs are not taxable (since it has no separate legal existence). In Young men’s India Association case, had three appeals before it, in one of which a company was involved.
- Further the phrase in the Article 366(29-A) “a body of persons” cannot be equated with “person”. As per Section 3(42) of General Clause Act, the person would include corporate person as well. Hence the use of phrase body of person makes it clear beyond the doubt that corporate persons are not referred to.
- The term “person” has widely used by the legislature. Say in Income-tax Act, stood in statue book since 1961. – Hence this language was available and in common usage of legislature. The contrast to the language used in the legislature, Article 366(29-A) used the phrase “body of persons” would not refer to the corporate form unless person by itself accompanied by the expression whether incorporated or not.
- Even otherwise supply of goods by an unincorporated association or body of persons to the member must be for cash, deferred payment, or other valuable consideration. The definition of consideration presupposes passing from one person to another person.
- As stated in Young Men’s India’s Association case and the doctrine of mutuality state, there is no sale transaction between the club and its members. There cannot be sale by one itself. The ratio of Young Men’s association has not done away with by a limited fiction introduced by Article 366(29-A)(e).
- The contention of the department that even otherwise the sub-clause (f) of Article 366(29-A) applies shall not stand by language used in the sub-clause and having regard to the statement of object and reasons for the amendment. Sub- clause (f) is included for doing away with the two judgement of this court (Supreme Court), where the sale of foods and drinks in hotels and restaurants. This being the case, it is obvious that the taxability of food or drinks served in the member’s club is not subject matter of sub-clause (f). If argument of the department is accepted then it would lead to an absurd situation where the sale of foods and drinks by clubs to members would not be taxable whereas the sale of other products like cosmetics etc., would come under tax net.
- In order to tax, there should be express reference to tax mutual association. Say for example in the Income tax Section 24 (vii) read with Section 44. In the absence of such language in sub-clause (e), the fact that the doctrine of mutuality cannot be done away with by the 46th Amendment.
7. Decision:
(i) The doctrine of mutuality continues to be applicable to incorporated and unincorporated member’s club after 46th amendment adding article 366(29-A) to the Constitution of India.
(ii) Young men’s India association (supra) and other judgements which applied this doctrine (principle of mutuality) continue to hold the field even after the 46th Amendment.
(iii) Sub-clause (f) of Article 366(29-A) has no application to members’ clubs.
Part B: Service tax – Context [Chief Commissioner of Central Excise and Service & Ors vs M/s Ranchi Club Ltd
There were various appeals made in the Service tax context, all the appeals were clubbed and decided by the Supreme Court.
1. Facts in most of the appeals:
Member’s club either registered under the companies Act or registered cooperative societies under Society Registration Act, 1860. It is also noted that the service provided by a club to other members, are paying taxes.
The question is whether the services provided by the Club to its members are subject to Service tax?
Decision and reasons provided by Jharkhand High Court in Ranch Club case:
- Both sale and service transactions require existence of two parties.
- In member’s club there is no existence of two person if service is provided by the club to its members.
- The High Court followed the decision of Supreme Court in the case of Young men’s India association (supra) and held the member’s club are not subject to service tax in relation to service provided by the club to its members.
2 Supreme court (larger bench) observations:
(the supreme court observed the relevant provisions under pre-negative list and post-negative list and various decisions of the Supreme Court).
A) Pre-negative list provisions and position:
- Charging section 66
There shall be levied the tax (referred to as “the service tax”) at the rate of 12% of the value of taxable services referred to in sub-clauses… (zzze) of clause (105) of section 65, and collected in such manner as may be prescribed.
- Section 65(105)(zzze) “Taxable Service“ defined as follows:
Taxable service means any service provided to its members or any other person by any club or association in relation to provision of services, facilities or advantage for a subscription or any other amount.
- Section 65(25a) “clubs or association “ defined as follows:
“Club or association means any person or body of persons providing services, facilities or advantages, primarily to its members for a subscription or any other amount, to its members, but does not include –
(i) any body established or constituted by or any other law for the time being force.
- Explanation to section 65, which was inserted by the Finance Act, of 2006, reads as follows:
“For the purpose of this section, taxable service includes any taxable services provided or to be provided by any unincorporated association or body of persons to a member thereof, for cash, deferred payment or any other valuable consideration”.
(emphasis supplied)
Position of law in pre-negative list regime:
– Even though the club is defined as any person or body of persons, it excludes any body established or constituted by or any other law for the time being in force.
– Thus, the companies and co-operative societies which are registered under the respective acts, can certainly considered as body constituted under those acts.
– The explanation (to section 65) is defined in same terms as Article 366(29-A)(e) of the constitution of India, Hence the expression, “body of persons” will not include an incorporated company, nor will it include any other form of incorporation including an incorporated co-operative society.
Accordingly, the members clubs are not subject to service tax in respect to services provided to its members.
B) Post-negative list provisions
– Section 65 and 65A were made inapplicable and new section 65B were introduced.
- Charging section 66B (on or after Finance Act 2012)
There shall be levied the tax (referred to as “the service tax”) at the rate of 14% of the value of all services other than those service specified in the negative list [Section 66D], provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed.
- Section 65B(44) “Service” was defined as follows, –
“Service” means any activity carried out by a person for another for consideration and includes a declared services but shall not include –
(a) An activity which constitutes merely-
(i) A transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or
(ii) Such transfer, delivery, or supply of any goods, which is deemed to be sale within the meaning of clause (29A) of Article 366 of the Constitution; or
(iii) A transaction in money or actionable claim.
Explanation 3: For the purpose of this chapter –
(a) an unincorporated association or body of persons, as the case may be, and a member thereof shall be treated as distinct persons.
(b) —
- Section 65B(37) “Person“ includes, –
(i) an Individual
(vii) an association of persons or body of individuals whether incorporated or not.
(emphasis supplied)
Comparison of pre-negative list and post-negative list
– Earlier the term “Service” was not defined, but now defined.
– Earlier each “Individual Service” on which tax was levied was defined (taxable service). Now negative list has been defined.
Position of law in negative list tax regime [Decision and rationale of the Decision]
– What has been stated in the present judgement so far as sales tax is concerned applies on all fours to service tax [rendition of service pre- supposes two persons; for consideration; one cannot sale to same person]
– Even though the term “Person” has been widely defined under section 65B(37), explanation 3 to Section 65B(44), instead of using the expression “person” or the expression “an association of persons or bodies of Individuals, whether incorporated or not”, uses the expression “a body of person” when used together with the term unincorporated association.
– Hence, as explained in pre-negative tax regime, the body of person does not refer to an incorporated company or an incorporated co-operative society; as the same expression included in explanation 3, it may be assumed that the legislature has continued with the pre-2012 scheme of not taxing member’s club when they are in the incorporated form.
D) Comparable provisions under the Income-tax Act, 1961
(applicable to mutual association)
1.1 Charging section [Section 4]
(1) Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions (including provisions for the levy of additional income-tax) of, this Act in respect of the total income of the previous year of every person.
1.2 Definition of Income
Section 2(24) Income includes –
(i) profits and gains
(v) any sum chargeable to income-tax under clauses (ii) and [1](iii) of section 28 or section 41 or section 59 ;
(vii) the profits and gains of any business of insurance carried on by a mutual insurance company or by a co-operative society, computed in accordance with section 44 or any surplus taken to be such profits and gains by virtue of provisions contained in the First Schedule ;
(viia) the profits and gains of any business of banking (including providing credit facilities) carried on by a co-operative society with its members; ——–
1.3 Definition of Person
Section 2(31) “Person” includes—
(i) an individual,
(iii) a company,
(v) an association of persons or a body of individuals, whether incorporated or not,
[2] Explanation.—For the purposes of this clause, an association of persons or a body of individuals or a local authority or an artificial juridical person shall be deemed to be a person, whether or not such person or body or authority or juridical person was formed or established or incorporated with the object of deriving income, profits or gains.
(emphasis supplied)
1.4 Decisions in the context of mutuality under Income-tax Act
- In Chelmsford Club (109 Taxman 215) the Supreme Court perused the definition of income under section 2(24) and concluded that the Act recognises the principle of mutuality and excludes all businesses involving such principle from its purview, except that of profits and gains of mutual insurance companies mentioned in clause (vii) of that section.
- In Income Tax Officer, Mumbai vs. Venkatesh Premises co-operative Society Limited (2018) 15 SCC 37, it was held that:
“14. The doctrine of mutuality, based on common law principles, is premised on the theory that a person cannot make a profit from himself. An amount received from oneself, therefore, cannot be regarded as income and taxable. Section 2(24) of the Income Tax Act defines taxable income. The income of a cooperative society from business is taxable under Section 2(24)(vii) and will stand excluded from the principle of mutuality.”
D) Relevant provisions of Central Goods and Service tax Act
1. Charging section [Section 9]
There shall be levied a tax called the CGST on all intra-state supplies of goods or services or both, on the value determined under section 15 and at such rates, but not exceeding 20% as may be notified by the Government on the recommendation of council and collected in such manner as may be prescribed and shall be paid by the taxable person.
2. Scope of supply [Section 7]
(1) For the purposes of this Act, the expression ‘supply’ includes –
(a) All forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business.
(b) The activities specified in schedule I, made or agreed to be made without a consideration.
(1A) where certain activities or transactions constitute a supply in accordance with the provisions of sub-section(1), they shall be treated either as supply of goods or supply of services as referred to in Schedule II.
Schedule II
[Activities or transactions to be treated as supply of goods or supply of services]
—–
7. Supply of goods –
The following shall be treated as supply of goods, namely:-
Supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment, or other valuable consideration.
3. Section 2(17) “business includes –
(a) —
—–
(e) Provision by a club, association, society, or any such body (for a subscription or any other consideration) of the facilities or benefits to the members.
4. Section 2(31) “Consideration” in relation to supply of goods or services or both includes –
(a) any payment or to be made, whether in money of otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or any other person but shall not include any subsidy given by the Central Government or a state Government.
5. Section 2(84) “person” includes:
(a) an Individual;
(f) an association of persons or body of individuals, whether incorporated or not, in India or outside India.
(Emphasis supplied)
6. It is pertinent to note the following points based on above provisions:
a) The subject matter of levy is supply (not sales though supply includes sales as per the definition of supply).
b) In addition to any of forms of supply provided in section 7, the following ingredients shall also be present:
(i) Two persons
(ii) Consideration [unless fall under sub-clause (b) to section 7(1)]
(iii) Furtherance of business
c) Similar to post negative list regime, CGST Act, has defined the term “Person”, which includes association of person or body of individuals whether incorporated or not.
E) Taxability under GST regime:
a) Arguments in favour of member’s club
- The decision of the larger bench of Supreme Court shall equally be applicable to GST context. The larger bench dealt both tax on sales of goods and services tax. GST is the combination of both and accordingly, the legal principles set out by the larger bench shall form part of binding precedent on the taxability of member clubs.
- One may compare the GST provisions with post negative service tax regime. The term “Person” has defined under post negative service tax regime, which includes association of persons or body of individuals whether incorporated or not. The similar definition of person is also present in GST regime. The expression provided in item 7 of Schedule II to CGST Act has similar expression provided in explanation 3 to Section 65B(44). Accordingly, a view can be taken that the body of person does not includes Company (registered under Companies Act) or Society (registered under Societies Registration Act, 1860.
- One may also take support of decisions of supreme court rendered in the context of Income-tax Act, 1961. The deeming provisions are to be interpreted very strictly. Unless there is an express inclusion in the definition of supply in relation to the supply of goods/ services of clubs to its members (similar to the inclusion definition of income provided in sub-clause (vii)/ (v) in section 2(24) of the Income-tax Act). GST shall not be applicable on supply of goods/ services provided by clubs to its members.
b) Arguments against the member’s club
- The larger bench decision is mainly based on the interpretation of Article 366(29-A) which defines the Tax on sale of goods. Now under the GST regime the relevance of Article 366(29-A) of the Indian Constitution, is limited, due to the following reasons:
(i) Opening phrase of Article 366 starts with following expression, “unless the context otherwise requires”. The rationale behind the insertion of Article 366(29-A) was that there were certain transactions which were not normally covered under the definition of sale (eg., Hire purchase) and further in certain kind of transactions both goods and services were involved (eg., works contract) , hence there was a need to define tax on sale of goods to provide jurisdiction to State legislature to tax the same in case of intra-state transaction in pre-GST regime (Accordingly, the Parliament does not have power to tax those transactions by virtue of residual power). It is relevant to note here that earlier laws (laws relating to tax on sale of goods and service tax) were made based on power vested under Article 246 read with Schedule VII to the Constitution.
(ii) Now, Article 246A provides equal rights both to the Parliament and State Legislature to tax on sale of goods and services in respect to intra-state transaction. Article 246A overrides Article 246.
(iii) Further under pre-GST regime, the subject matter of tax is supply (not sale even though the term supply includes sale).
Hence, the interpretation based on Article 366(29-A) may not completely applicable in GST context.
- To question the constitutional validity of GST provisions (relating to the members club) either there should be short of power of the legislature provided by the constitution or the same should infringe/ violate Part III of Indian Constitution. Under the GST context, there is an adequate power provided in Article 246A and unless one shows any of the provisions relating to the fundamental rights has been violated/ infringed, the provisions contained in GST Act would survive.
- The GST regime has adequate provisions to tax member’s club. In order to constitute supply, there should be two persons, consideration to be passed from one person to another person (unless the activities covered under schedule I) and the activities shall be in the course of furtherance of business.
a) The term “Person” defined under section 2(84) of CGST Act, includes – (i) an Individual; and (ii) an association of persons or body of Individuals, whether incorporated or not.
(the supreme court also in the above decision, accepted the contention that the member’s club would fall under the category of association of persons or body of individuals whether incorporated or not).
b) Since the Individuals and the club are considered as two different persons, hence, the payment made by the members to the club for provision of goods/ service would form part of consideration.
c) The term business has been defined under Section 2(17) of CGST Act, which includes provision of club (for a subscription or any other consideration) of the facilities or benefits to the members.
Since all the ingredients provided under the definition of supply are satisfied, the same would be taxable under GST regime.
- Item 7 provided in Schedule II under GST regime, may not act as impediment to tax. The reason being sub-section (1A) of Section 7 read with Schedule II, deals with classification of goods or services. It may not be read for chargeability of GST on the transactions between club and the members.
- Further, it is the rule of interpretation that explanation (given in the section) extends the application of main section and proviso restricts the application of main section. In this context one may note that in post-negative list regime the explanation has the expression “for the purpose of this chapter” [Explanation 3 to Section 65B in post-negative list regime] that may be the reason that Apex Court has restricted the application of definition provided in the main part of the section.
- The interpretation provided in the context of Income-tax Act, may not wholly applicable in GST context for the following reasons:
a) The subject matter of tax under Income-tax Act, is Income. Hence, there is necessity to carry on business/ have profit motive to tax under Income-tax regime. Unlike GST, the term business is not elaborately defined in income-tax Act [Section 2(13) of the Income-tax Act, 1961] to include provision by a club/ association/ society, or any such body (for a subscription or any other consideration) of the facilities or benefits to the members.
b) Most of the decisions rendered in the context of clubs are based on the law prevalent before insertion of Explanation to the definition of Person under section 2(31) of the Income-tax Act.
c) One may also interpret the ruling of Chelmsford club, by giving the meaning, the Income-tax Act excludes from the purview of tax (which are not considered as income due to mutuality principle) by including certain items [even though it is not an income as per mutuality principle similar to sub-clause (vii)], in the definition of income 2(24). In the GST context there is no such type of inclusion under the definition of Supply and accordingly it can be interpreted that all forms of supply (even though the same may not be sale as per principle of mutuality) would subject to tax.
Conclusion:
It may not be easy to conclude GST is not applicable to members clubs based on the Apex Court Larger bench decision. One must understand the background and take the position based on the facts and circumstances of each case.
For any clarification, readers can be reached to the author at casathish.chandran@gmail.com.
[1] [(Section 28(iii) income derived by a trade, professional or similar association from specific services performed for its members]
[2] Explanation was inserted by the Finance Act, 2002.
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Excellent Analysis of the case. Good reading material