Charity and Mutuality Under GST

INTRODUCTION

1. Charity and mutuality are age-old concepts. The former is done as an act of benevolence. The latter is an arrangement to achieve a common purpose. One undertaking such acts, therefore, needs to appreciate the implications under the GST laws to avoid any undue demands in future. This is more relevant for the reason that GST if found leviable but not collected will add as a cost for such persons who may not have intended to derive any personal gain from such action. In the present article, we shall discuss several facets of the given two concepts.

CHARITY

2. Charitable entities are per se not unconditionally exempt from GST. Sec. 9(1) of the CGST Act, 2017 or Sec. 5(1) of the IGST Act, 2017 provides for the charge of tax on the supply of goods or services or both and the tax shall be paid by the taxable person.

3. The term “person” as defined u/s 2(84) of the CGST Act, 2017 includes trust as well as every artificial juridical person. The term “taxable person” has been defined u/s 2(107) of the said Act to mean a person who is registered or liable to be registered. Hence charitable entities will be regarded as “person” under the GST law. Further the same may be regarded as a “taxable person” if they are registered or liable to be registered either on account of the aggregate turnover exceeding the threshold limits or on account of the entity covered under compulsory registration u/s 24.

4. The scope of supply has been provided u/s 7 of the CGST Act, 2017. Essentially the said scope has the following three elements viz.

(a) supplies involving consideration made in the course or furtherance of business;

(b) activities specified in Schedule I, made or agreed to be made without a consideration;

(c) import of services for a consideration in the course or furtherance of business;

5. Therefore the supplies involving consideration can be brought to tax only if the said supplies are made in the course or furtherance of business. In other words, supplies involving consideration not made in the course or furtherance of business cannot be brought to tax.

6. Now the term “business” has been defined u/s 2(17) of the CGST Act, 2017 to include any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit. Said transactions stands included as “business” whether or not there is volume, frequency, continuity or regularity of such transaction. The definition also further includes any activity or transaction in connection with or incidental or ancillary to the main transactions.

7. The aforesaid discussion implies that the main activity of the entity in question shall be in the nature of any trade, commerce, etc. If the main activity fulfils the requisite test, then all incidental or ancillary activity related to such main activity shall also be included as a business. Once the same is so, then the supplies (either main or ancillary) involving consideration shall be subjected to tax.

Profit motive

8. The definition of “business” u/s 2(17) includes the activities in the nature of any trade, commerce, etc. whether or not the same is undertaken for pecuniary benefit. Hence one can say that the test of profit motive shall not be relevant to determine whether the activity is in the nature of the business or not. However, can that mean that all the activities under the sun shall be included as “business” in the absence of the test of the profit motive?

Commercial character

9. An issue arose before the Hon’ble Supreme Court in the case of CST v. Sai Publication Fund (2002) 126 STC 288 (SC) as to whether the given trust can be held to be a “dealer” in respect of the sale of books, booklets, pamphlets, photos, stickers and other publications containing the message of Saibaba and the turnover of such publication can be assessed to sales tax under the Bombay Sales Tax Act, 1959 or not? The term “dealer” was defined to be a person who carries on the business. The term “business” was defined to include any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture whether or not such trade, commerce, manufacture, adventure or concern is carried on with a motive to make gain or profit. The Hon’ble Court held that the question of profit motive or no profit motive would be relevant only where the person carries on a trade, commerce, manufacture or adventure in the nature of trade, commerce etc. The Court further held that the incidental or ancillary activity can be made liable to tax only if the main activity thereof is in the nature of business. In the given facts and circumstances of the case, the Court opined that the main activities of the trust cannot be said to be in the nature of business and hence the incidental or ancillary activities in terms of sale of books, etc. at cost cannot be made liable to tax. The Court, therefore, held that the main transaction should be of a commercial character even if the test of profit motive stands eliminated.

10. It may be noted that in the aforesaid case the facts lead the Court to the conclusion that even the incidental activity in terms of selling books is related to the main object i.e. promoting the teachings of Saibaba and hence the same cannot be considered to be in the nature of any trade, commerce, etc. The said reasoning therefore cannot apply in situations where the activity in consideration has no nexus with the main object but stands as an independent activity even though the funds generated from the said activity are used for the main object. The said reasoning also cannot apply in situations where the income from the activities under consideration is substantial. Further, the aforesaid decision was in the context of the definition of “dealer”. Hence once it is held that such Trust is not a dealer, the sales made by it cannot be brought to tax. On the other hand, the scope of supply u/s 7(1)(a) of the CGST Act, 2017 which creates a nexus with business applies qua the supply and not qua the person. Hence each supply is required to be independently assessed in light of the given provisions. Therefore we can conclude by stating that one has to be very circumspect while determining whether the activities in question are in the course or furtherance of business or not. A better view will be to test each activity separately in arriving at the conclusion.

Usage of funds

11. The levy as discussed above is on the supplies of goods or services or both for consideration in the course or furtherance of business. Hence the eventual usage of the funds generated through the supplies shall not be relevant for determining whether the given supplies were made in the course or furtherance of business or not. Hence a charitable entity may undertake an activity of the sale of goods or provision of services for consideration, then the same shall be liable to tax even if the eventual usage of such income is for charity.

Aggregate turnover

12. The term “aggregate turnover” has been defined u/s 2(6) of the CGST Act, 2017 to mean the aggregate of all supplies (taxable as well as exempt). Therefore for ascertaining the requirement for registration u/s 22 of the said Act (i.e. aggregate turnover exceeds the threshold limits of Rs. 10/20/40 lakhs), the aggregate value of taxable as well as exempt supplies made by the given charitable entity is required to be considered.

Donations

13. The scope of supply u/s 7(1)(a) of the CGST Act, 2017 includes supplies made for consideration. The term “consideration” has been defined u/s 2(31) of the said Act to include any payment made in respect of, in response to, or for the inducement of the supply. Hon’ble Bombay High Court in the case of BaiMamubai Trust vs. Suchitra 2019 (31) GSTL 193 (Bom.) held that enforceable reciprocal obligations are essential to a supply covered u/s 7(1)(a).Further, the words “consideration” and “payment” denotes a contractual link with the supply in question. Hence voluntary donations without creating any enforceable obligations cannot be said to be a consideration and thus the same cannot be made liable to tax.

Exemptions

14. As discussed earlier, the scope of supply is very wide and hence the supplies made by the charitable entities for consideration can escape tax only if the same stands specifically exempted. Now Notification No. 12/2017 – CT (Rate) dt. 28.06.2017 issued by the Government in the exercise of powers granted u/s 11 of the CGST Act, 2017 contains certain exemptions in respect of charitable entities. Sr. No. 1 of the said notification provides as under:

Sl. No.	Chapter, Section, Heading, Group or Service Code (Tariff)	Description of Services	Rate (per cent.)	Condition
1	Chapter 99	Services by an entity registered under section 12AA of the Income-tax Act, 1961 (43 of 1961) by way of charitable activities	Nil	Nil

15. Aforesaid entry, therefore, grants exemption in respect of services:

(b) supplied by an entity registered u/s 12AA of the Income Tax Act, 1961 and

(c) by way of charitable activities.

Entity registered u/s 12AA

16. Charitable or religious trusts can claim the benefits u/s 11 and 12 of the Income Tax Act, 1961 provided they apply for registration u/s 12A of the said Act. Sec. 12AA, therefore, contains the procedure for the grant of such registration. The Sr. No. 1 (supra) grants an exemption under GST only to the entities registered u/s 12AA.

17. It may be noted w.e.f. 01.04.2021 a new procedure for obtaining fresh registration has been inserted by way of Sec. 12AB of the Income Tax Act, 1961. Existing, as well as new trusts fulfilling the criteria, has to apply afresh for obtaining the registration u/s 12AB. Now while inserting the new Sec. 12AB under the Income Tax Act, 1961 no parallel amendment has been made at Sr. No. 1 (supra) which continues to refer to only the entities registered u/s 12AA. Can it thus imply that w.e.f. 01.04.2021 the charitable or religious trusts which will now be registered u/s 12AB cannot claim the GST exemption?

18. Any given legislation can provide for the meanings to the words given under some other legislations either by “incorporation” or by “reference”. If the meaning is given by “incorporation” then the meaning existing on the date of the said incorporation shall have to be applied. However, if the meaning is given by “reference”, then even the meaning as amended from time to time shall have to be applied. The method adopted by the draftsman i.e. “incorporation” or “reference” depends on the purpose and context (see U.P. Avas Evam Vikas Parishad vs Jainul Islam (1998) 2 SCC 467). In the given context we can submit that the meaning as to which entity can claim the exemption under GST is with reference. Hence an amendment in the referred Act (i.e. Income Tax Act, 1961) will have to be read into the exemption entry. Thus it can be said that even the entity which will now be registered u/s 12AB of the Income Tax Act, 1961 will also be eligible for exemption in respect of services provided by way of charitable activities.

Charitable activities

19. The exemption in respect of services provided by the entities registered u/s 12AA of the Income Tax Act, 1961 does not extend to all services. It extends only to the services “by way of charitable activities”. The term “charitable activities” has been defined under paragraph 2(r) of the Notification No. 12/2017 – CT (Rate) as under:

“charitable activities” means activities relating to –

(i) public health by way of, –

(A) care or counselling of

(I) terminally ill persons or persons with severe physical or mental disability;

(II) persons afflicted with HIV or AIDS;

(III) persons addicted to a dependence-forming substance such as narcotics drugs or  alcohol; or

(B) public awareness of preventive health, family planning or prevention of HIV infection;

 (ii) advancement of religion, spirituality or yoga;

 (iii) advancement of educational programmes or skill development relating to,-

(A) abandoned, orphaned or homeless children;

(B) physically or mentally abused and traumatized persons;

(C) prisoners; or

(D) persons over the age of 65 years residing in a rural area;

(iv) preservation of environment including watershed, forests and wildlife;”

Therefore the aforesaid exemption extends only to the activities which relate to the aforesaid aspects.

Other exemptions

20. There are several other exemptions in respect of services that can be availed by charitable entities. A brief gist is as under:

Sr. No. of Notification No. 12/2017 – CT (Rate)	Brief text
9D	Services by an old age home
13	Services by a person by way of conduct of any religious ceremony or renting of precincts of a religious place
50	Services of public libraries
60	Services by a specified organisation in respect of a religious pilgrimage
66	Services provided by an educational institution or to an educational institution
74	Services by way of health care services
76	Services by way of public conveniences
77	Service by an unincorporated body or a non-profit entity to its own members
77A	Services provided by an unincorporated body or a non-profit entity engaged in the welfare of industrial or agricultural labour or farmers or promotion of trade, commerce, etc.
80	Services by way of training or coaching in recreational activities relating to sports

21. There are no specific exemptions provided in respect of the supply of goods by charitable entities. However, there are exemptions (e.g. Prasadam supplied by religious places like temples, mosques, churches, gurudwaras, dargahs, etc.) that may be availed based on the nature of the underlying supply of goods.

Manner of interpretation

22. 5-judge larger bench of the Hon’ble Supreme Court in the case of Commissioner of Cus. V. Dilip Kumar & company 2018 (361) E.L.T. 577 (S.C.) held that the burden to prove for its entitlement is on assessee claiming exemption and if there is any ambiguity in exemption Notification, the benefit of such ambiguity cannot be claimed by the assessee and it must be interpreted in favour of Revenue. However recently the 3-judge bench of the Hon’ble Supreme Court in the case of Government of Kerala & Anr. V. Mother Superior Adoration Convent (Civil Appeal No. 202 of 2012) (SC) held that the 5-Judge Bench judgment did not refer to the line of authority which made a distinction between exemption provisions generally and exemption provisions which have a beneficial purpose. It further held that exemption provisions that have a beneficial purpose are required to be construed in a manner that achieves the purpose. The exemption granted at Sr. No. 1 (supra) can be said to have been granted to achieve a beneficial purpose of not taxing the specified charitable activities which are for the general good of the society. Hence in such a situation, it can be said that the ambiguity while interpreting such exemptions has to be decided in favour of the assessee.

MUTUALITY

23. The doctrine of mutuality means the persons carry on a certain activity in such a way that there is a commonality between contributors of funds and participators in the activity. In other words, a complete identity is established between the two in such a manner that the same cannot be treated as separate persons so as to entail any sale of goods or provision of services inter se. Private clubs or associations (whether incorporated or not) operate on the said doctrine to fulfil the common objections (such as maintenance, etc.).

24. The first English case on the aspect of mutuality was of Graff v Evans (1882) 8 Q.B. 373 wherein it was held that the sale of liquor by a club to its members is not a sale within the meaning of a statute prohibiting any person from selling by retail intoxicating liquor without a license. Hence the doctrine of mutuality was first applied in a situation of criminal proceedings and not in the situations of a tax dispute.

25. Subsequently, before the 46^th Constitutional Amendment whereby the concept of “deemed sale” was introduced vide Article 366(29A), the Constitution Bench in the case of Young Men’s Indian Association case (1970) 1 SCC 462 (SC) held that the club merely acts as an agent of member’s and in absence of two separate persons, there cannot be any sale.

26. Vide the 46^th Constitutional Amendment the definition of the “tax on sale or purchase” under Article 366(29A) was introduced to include under clause (e)a tax on the supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration. Therefore it appeared that post the said inclusion, the doctrine of mutuality will have no application.

27. However, the Constitution Bench of the Hon’ble Supreme Court in the case of Calcutta Club Ltd. [TS-779-SC-2019-VAT] upheld the application of the doctrine of mutuality on the ground that even after the 46^th Constitutional Amendment the same shall survive. The reasoning adopted by the Supreme Court is very interesting. The Court noted that before the 46^th Constitutional amendment, the Supreme Court in the case of Young Men’s Indian Association held that the doctrine of mutuality shall apply not only to unincorporated clubs but even to the incorporated clubs. The drafters of the 46^th Constitutional amendment thus missed the ratio of the said decision and presumed that the doctrine had as such no applicability in case of incorporated clubs (i.e. sales were already taxable) and hence only included the supplies made by unincorporated clubs under Article 366(29A). The Supreme Court also noted that the word “consideration” used under Article366(29A)(e) implies the presence of two separate persons (i.e one making the supply and the other paying the consideration). Hence the Court concluded that the 46^th Constitutional amendment does not do away with the doctrine of mutuality and hence held that VAT or service tax cannot be levied on the collections made by such clubs from its members.

28. When the GST was introduced, the concept of supply u/s 7(1)(a) of the CGST Act, 2017 retained the aspect of “consideration” and hence lead to the conclusion that even under GST the presence of two persons is a must to bring the supplies involving the consideration to tax. This view prevailed even though the definition of “business” u/s 2(17) of the said Act under clause (e) included the provision by a club, association, society, or any such body (for a subscription or any other consideration) of the facilities or benefits to its members. This was because the aspect of consideration coming from the separate person is a sine qua non for bringing the collection from the members to tax.

29. To overcome the decision in the case of Calcutta Club Ltd. (supra) in the context of GST, a retrospective amendment has been made u/s 7(1) by way of introducing a new clause (aa) which reads as under:

“(aa) the activities or transactions, by a person, other than an individual, to its members or constituents or vice versa, for cash, deferred payment or other valuable consideration.

Explanation. — For the purposes of this clause, it is hereby clarified that, notwithstanding anything contained in any other law for the time being in force or any judgment, decree or order of any Court, tribunal or authority, the person and its members or constituents shall be deemed to be two separate persons and the supply of activities or transactions inter se shall be deemed to take place from one such person to another”

30. The aforesaid amendment when notified will apply retrospectively w.e.f. 01.07.2017 (i.e. from the very introduction of GST). Further Sr. No. 7 of Schedule II to the CGST Act, 2017 which considered supply of goods by any unincorporated association or body of persons to a member as the supply of goods is also deleted retrospectively vide Finance Act, 2021.

Relevance of the two-person

31. Now the moot point to ponder is whether the aforesaid amendment can be said to do away with the requirement of the presence of two persons to permit the imposition of the tax on the supplies between the same. The amendment clearly provides that the activities or transactions by a person (other than the individual) to its members or constituents or vice versa, for cash, deferred payment or other valuable consideration shall be considered as supply. An Explanation added further clarifies that the person and its members or constituents shall be deemed to be two separate persons and the supply of activities or transactions inter se shall be deemed to take place from one such person to another. Therefore the lacuna observed by the Hon’ble Supreme Court in the context of the 46^th Constitutional amendment seems to have been taken care of for the reason that the introduced amendment includes every person (other than the individual) and hence seeks to cover incorporated as well as unincorporated clubs. Further, the aspect of “consideration” requiring the presence of two persons has also been done away with by way of an Explanation deeming the clubs and members as two separate persons.

32. Hence we can say that post the notification of the aforesaid amendment with a retrospective effect, the relevance of two persons in the context of supplies made by clubs to its members will not be required. Therefore subject to the available exemption, the tax shall be leviable on the supplies made by the clubs to its members. In other words, the doctrine of mutuality has been given a go-by.

Business

33. A question may arise as to whether even after the retrospective amendment, can it be contended that certain clubs/associations (e.g. housing maintenance) do not undertake the transactions in the course or furtherance of business and hence on the said ground the consideration shall not be liable to tax? It may be noted that the retrospective amendment by way of clause (aa) does not refer to a nexus with business so as to attract the tax. Even otherwise the definition of business u/s 2(17)(e) of the CGST Act, 2017 includes within its scope the provision by a club, association, society, or any such body (for a subscription or any other consideration) of the facilities or benefits to its members. Therefore the liability of tax in the case of clubs/associations cannot be challenged on the said ground.

The ambit of the new clause

34. The bare reading of the new clause suggests that “activities or transactions” for cash, deferred payment or other valuable consideration shall be leviable to tax. Can it imply that the capital receipts (in the form of corpus contributions by the members) and refundable/withdrawable, based on the bye-laws, as part of the capital can also be liable to tax?

35. The word “consideration” as defined u/s 2(d) of the Indian Contract Act, 1872, even if applied considering the club and member as separate persons, entails the act or abstinence done by the promisee at the desire of the promisor. It, therefore, implies a payment against a promise in the nature of the supply of goods or services. Therefore applying the legal maxim of noscitur a sociis (associated words are to take their meaning from one another) the word “transactions” appearing in the new clause shall take its meaning from the adjoining word “activities” to imply the presence of supply for the transaction to be brought to tax. Therefore it can be contended that the corpus amounts as part of the capital contribution should not be liable to tax.

Pure agent

36. The retrospective amendment by way of introduction of Sec. 7(1)(aa) of the CGST Act, 2017 do not prohibit the application of the concept of the pure agent as far as the club/association and its members are concerned. It is possible that such club/association may make payments in respect of the obligations of the members (e.g. electricity charges in respect of individual members based on sub-meters when there is a common connection (due to constraints of Electricity laws)). In such a case, a view can be taken that such reimbursements are covered under the concept of the pure agent as provided in Rule 33 of the CGST Rules, 2017. It may however be noted that the said concept cannot be applied in situations where it is an obligation of the club/association to incur the expense (e.g. electricity charges for common areas) as part of the provision of the maintenance services.

Exemption

37. No. 77 of Notification No. 12/2017 – CT (Rate) grants the exemption to the following supplies:

“Service by an unincorporated body or a non- profit entity registered under any law for the time being in force, to its own members by way of reimbursement of charges or share of contribution –

(a) as a trade union;

(b) for the provision of carrying out any activity which is exempt from the levy of Goods and service Tax; or

(c) up to an amount of seven thousand five hundred rupees per month per member for sourcing of goods or services from a third person for the common use of its members in a housing society or a residential complex.”

38. Therefore the exemption is available to housing society or residential complex in situations where the reimbursement of charges or share of contribution is up to Rs. 7,500/- per month per member.

39. What may happen if the reimbursement of charges or share of contribution exceeds Rs. 7,500/- per month. Whether the entire amount shall stand taxable or only an amount exceeding Rs. 7,500/-. The language of the exemption suggests that the same is available “up to” Rs. 7,500/-. Hence the tax shall be payable only on the amounts received over Rs. 7,500/- since up to Rs. 7,500/- the exemption is available. However, the matter can be litigated because of the contrary position taken by the Board Circular No. 109/28/2019- GST dt. 22.07.2019. Recently Hon’ble Madras High Court in the case of GREENWOOD OWNERS ASSOCIATION v. UOI 2021-TIOL-1505-HC-MAD-GST has held that only the consideration above Rs. 7,500/- would be taxable under the GST Act.

Retrospective amendment – interest and penal consequences

40. Many clubs or associations would not have taken the registration and discharged the GST for the reason that the law before the retrospective amendment lead to the conclusion that there cannot be a taxable supply between the clubs and their members on the principle of mutuality. Now such clubs or associations will be faced with the dilemma in respect of the liability for the past periods (i.e. from July 2017). Few may want to challenge the retrospective amendment and wait for the outcome. It shall entail long litigation. The retrospective amendment can be challenged on the ground of arbitrariness and irrationality offending Article 14 of the Constitution (see Tata Motors Ltd. V. State of Maharashtra AIR 2004 SC 3618 and R C Tobacco (P) Ltd. v. UOI (2005) 7 SCC 725) for the reason that the said amendment puts an onerous liability on the clubs or associations which are merely conduits for fulfilling the common objective of the members.

41. Others may want to accept the retrospective amendment and accordingly will be willing to pay the tax for the past periods. However, the immediate question that will come is whether interest and penalty will also be payable on the past tax dues. Further, can the department invoke an extended period of limitation u/s 74 of the CGST Act, 2017 to recover the non-paid dues? It is a settled law that no offence and penalties can be created with retrospective effect. Further, the extended period of limitation also cannot be invoked based on the retrospective amendment in absence of any intent to evade the tax (see K. SPINNING AND WEAVING MILLS LTD. v. UOI 1987 (32) E.L.T. 234 (S.C.). Further Hon’ble Supreme Court in the case of Star India Pvt. Ltd. vs. Comm. of Central Excise 2006 (1) STR 73 (S.C.) held that even the liability to pay interest would only arise on default and is really in the nature of a quasi-punishment. Such liability although created retrospectively could not entail the punishment of payment of interest with retrospective effect.  Therefore in absence of any failure to pay the tax in the past, interest cannot be imposed provided the payment for the past dues is made by considering it as due for the tax period in which the retrospective amendment is notified.

Retrospective amendment – ITC for past periods

42. An additional issue may also arise in respect of input tax credit (‘ITC’). If the clubs or associations are seeking registration today for discharging even the past liabilities, can such clubs or associations avail ITC in respect of the tax paid for the inward supplies of goods/services which are in turn used in providing the services to its members? Sec. 16(1) of the CGST Act, 2017 allows only the registered person to avail of the ITC. The clubs or associations not holding the registration at the time of receiving the inward supplies in the past, therefore, cannot avail the ITC in respect of past period even if they are now made to pay the tax vide retrospective amendment. However, the Hon’ble Supreme Court has invoked the doctrine of fairness (see Vijay v. State of Maharashtra (2006) 6 SCC 289) while interpreting the retrospective amendments. The basis of the said doctrine is that simple fairness ought to be the basis of every legal rule. Therefore one can apply the said doctrine of fairness in the present context to say that when on one hand a retrospective amendment is creating the levy, on the other hand, the ITC also ought to be allowed. The said view will be aligned with the Statement of Objects and Reasons promulgated while introducing the CGST Bill, 2017 before the Parliament which provides for avoiding the cascading effect of tax.

Conclusion

43. Aforesaid discussion entails that the charitable entities must carefully assess their activities to determine the registration requirement as well as liability to pay the tax. If applicable, it is advisable to seek the registration as that will also enable availment of input tax credits qua the taxable transactions.

44. Readers might have also felt that the approach taken to tax the clubs or associations with a retrospective effect could have been avoided when they are merely conduits for incurring the common expenditure. The same may not yield substantial revenue for the Government but will certainly create undue hardships for such clubs/associations. A better approach, if at all the same are to be subjected to tax, would have been to do it prospectively. This can be the least one can expect on the eternal ground of fairness. One should let bygones be bygones.

(The present article was first published in the Journal of the Chamber of Tax Consultants)