GST on Club Members’ Contributions: Unconstitutional & Void – Kerala HC

GST on Club Members’ Contributions: Unconstitutional, Ultra Vires, and Void under Articles 246A, 366(12A), and 265 : The Kerala High Court, 11th Day of April 2025

The Kerala High Court, in a landmark judgment the 11th Day of April 2025 in the case of Indian Medical Association Vs Union of India declared Sections 7(1)(aa) and 2(17)(e) of the CGST and KGST Acts unconstitutional, holding that the retrospective levy of GST on services provided by clubs and associations to their members violates core constitutional provisions. The case arose from a challenge by the Indian Medical Association, Kerala Branch, which contended that transactions between a club and its members are governed by the principle of mutuality—a doctrine that treats an association and its members as the same legal entity, thereby negating any concept of “supply” between them.

To counter this principle, the Finance Act, 2021 inserted clause (aa) in Section 7(1) of the CGST Act, retrospectively effective from 1 July 2017, and enforced from 1 January 2022. The inserted provision reads as follows:

“Section 7(1)(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.”

Further, an Explanation was added clarifying 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.”

This deeming fiction sought to bypass the doctrine of mutuality and artificially create a “supply” between a club and its members, making such transactions taxable under GST law. However, the Kerala High Court held that this amendment violated Article 246A of the Constitution, which empowers the legislature to impose GST only on actual supplies of goods or services. Since mutuality inherently denies the existence of two distinct persons, no supply arises in such cases. The Court emphasized that legal fiction cannot expand legislative competence beyond the Constitution’s framework.

Constitutional Provisions Involved

1. Article 246A – Special Provision for GST

“Notwithstanding anything in Articles 246 and 254, Parliament and State Legislatures have power to make laws with respect to goods and services tax.”

Kerala HC’s Finding: Article 246A only empowers taxation of “supply” of goods or services. By deeming transactions under mutuality as “supply” through fictional legal constructs, Parliament went beyond the ambit of Article 246A. The Court emphasized that mutuality negates the concept of “supply” — if the supplier and recipient are the same legal entity, no supply occurs. Therefore, deeming such non-existent transactions as “supply” exceeds the legislative field under Article 246A.

2. Article 366(12A) – Definition of Goods and Services Tax

“Goods and services tax means any tax on supply of goods or services or both except taxes on the supply of alcoholic liquor for human consumption.” This provision confines GST to actual “supply”. Kerala HC held that mere legislative fiction cannot override the core meaning of “supply” under the Constitution. Thus, fictionally creating a supply between an entity and itself (i.e., members = club) violates Article 366(12A).

3. Article 265 – Taxation Only by Authority of Law

“No tax shall be levied or collected except by authority of law.”

• The Court read this to mean that taxation must be:
  • Constitutionally valid,
  • Within legislative competence, and
  • Not arbitrary or unreasonable.
• The retrospective levy from 2017 was seen as violating fairness and reasonableness, especially when:
  • There was no clarity in law during the prior period.
  • Clubs didn’t collect GST from members.
  • It created an impossible compliance burden post-facto.
• Thus, retrospective application without legal certainty violated Article 265.

Principle of Mutuality

In law, a club and its members are treated as one and the same entity. This principle was affirmed in the Supreme Court decision in State of West Bengal v. Calcutta Club Limited (2019).

HC’s View:

The 2021 amendments tried to override this doctrine without amending the Constitution. Unless the Constitution itself is amended to treat clubs and members as distinct, Parliament cannot simply override mutuality by statute.

Retrospective Application Declared Unjust

The Court was particularly critical of retrospective taxation for the following reasons:

1. Violates Rule of Law — entities were taxed for periods where they were not aware of liability.

2. No Opportunity to Collect Tax — clubs couldn’t pass on the tax to members post-facto.

3. Creates Financial and Legal Hardship — huge liabilities suddenly imposed for past periods.

Thus, even though the Court didn’t go into the formal validity of retrospective effect, it agreed with the single judge that retroactive taxation in this context is illegal and violates fairness.

Final Declaration by the Court

Sections 2(17)(e) and 7(1)(aa), and the Explanation thereto of the CGST and KGST Acts, are declared unconstitutional and void as they are ultra vires Articles 246A, 366(12A), and 265 of the Constitution of India.

Unconstitutional, Ultra Vires Articles 246A, 366(12A), and 265 and Void

In conclusion, the Kerala High Court declared that Section 2(17)(e), Section 7(1)(aa), and the Explanation thereto of the CGST and KGST Acts are unconstitutional and void, as they are ultra vires Articles 246A, 366(12A), and 265 of the Constitution of India. This judgment has wide-ranging implications.

1) Firstly, no GST is applicable on services provided by clubs or associations to their own members in Kerala, so long as the principle of mutuality applies.

2) Secondly, any attempt by tax authorities to retrospectively recover GST from such associations for the period beginning 1 July 2017 is invalid.

3) Lastly, unless the Supreme Court overturns or stays this judgment, the amendments brought by the Finance Act, 2021, stand void within the jurisdiction of Kerala.

The Principle of Mutuality & Resident Welfare Associations (RWAs),

The Principle of Mutuality a foundational concept in tax jurisprudence, posits that one cannot make a profit out of oneself. Under this doctrine, transactions between an association and its members are not considered as occurring between distinct legal persons, and are therefore not regarded as taxable “supplies” under indirect tax laws. This concept was firmly affirmed by the Supreme Court in the Calcutta Club case under the service tax regime, and has been further reinforced by the recent ruling of the Kerala High Court under GST, which struck down deeming provisions that attempted to artificially separate members from their associations.

Despite this established legal principle, Resident Welfare Associations (RWAs) are currently required to collect GST at a rate of 18% on monthly maintenance charges that exceed ₹7,500 per member. The underlying transactions—where members collectively contribute for the maintenance of shared premises—are conceptually similar to those in club-member dealings. However, the differential treatment arises due to a combination of statutory policy, legal characterizations, and administrative practice.

The primary statutory basis for imposing GST on such transactions is found in Notification No. 12/2017–Central Tax (Rate), Entry 77, which provides an exemption for unincorporated bodies or non-profit entities (such as RWAs) for services provided to their members up to ₹7,500 per month. If the monthly contribution exceeds this threshold, GST is applied to the entire amount rather than just the excess, thereby implicitly recognizing the mutuality principle while imposing a policy cap that treats contributions above ₹7,500 as taxable. This exemption appears to be a compromise—acknowledging mutuality up to a limit while imposing tax beyond it, not necessarily grounded in a doctrinal analysis of mutuality but rather driven by fiscal policy. Moreover, a key legal distinction lies in the structural and functional differences between RWAs and traditional clubs or associations. Organizations like the Indian Medical Association or the Calcutta Club are often registered as societies or Section 8 companies with explicitly charitable or mutual aims. In contrast, RWAs, while also non-profit and member-based, are typically constituted under cooperative or apartment laws and are tasked with managing common property, services, and facilities. Courts and tax authorities sometimes treat RWAs as service providers because they engage vendors, staff, and contractors, thereby interpreting their operations as involving consideration for services rendered. This approach has led to a more “business-like” characterization of RWAs as compared to the mutual, recreational, or professional objectives typically associated with clubs.

Notably, unlike clubs—which have been subject to authoritative judicial decisions such as the Calcutta Club judgment—there is as yet no binding Supreme Court ruling directly addressing the applicability of GST on RWAs in light of the mutuality principle. As a result, the current tax treatment of RWAs is guided more by CBIC circulars, departmental clarifications, and the structure of exemption notifications rather than by firm judicial pronouncements affirming or rejecting the mutuality doctrine in this specific context. From a doctrinal standpoint, many tax experts argue that the treatment of RWAs under GST is inconsistent with established legal principles. If the Supreme Court has declared that clubs and their members are the same legal person and that no “supply” exists, it raises the question of why similar reasoning should not apply to RWAs. The Kerala High Court’s ruling in Union of India v. Indian Medical Association Kerala State Branch (2024), which struck down the deeming fiction in Sections 7(1)(aa) and 2(17)(e) of the CGST Act, bolsters the case for treating RWA-member transactions as non-taxable under the principle of mutuality. This development may serve as a catalyst for future constitutional or judicial challenges to the imposition of GST on RWA maintenance charges exceeding ₹7,500, especially in the absence of a constitutional amendment that would redefine the concept of “supply” to override mutuality.

In summary, while the legislative framework for GST provides a conditional exemption for RWAs, its imposition of tax on maintenance charges above ₹7,500 per member diverges from the established judicial principles of mutuality. The mutuality doctrine—as reinforced by landmark income tax cases and the recent Kerala High Court ruling—clearly dictates that transactions within a mutually beneficial, non-profit association should not be treated as taxable supplies. However, the current policy, influenced by administrative practice and fiscal considerations, treats RWAs more like commercial service providers, despite their core function of managing common facilities for the benefit of the same group of members. This incongruity between doctrine and practice not only undermines the constitutional tenets of fairness and neutrality but also paves the way for potential future challenges aimed at realigning the GST regime with the longstanding principle of mutuality.

The Principle of Mutuality & Income Tax Act 1961

No Income Tax on receipts by the Society from its members as maintenance charges

The doctrine of mutuality has long been enshrined in Indian tax law, as demonstrated by its consistent application under income tax regulations. Landmark rulings such as Bankipur Club [(1997) 5 SCC 394], Chelmsford Club [(2000) 3 SCC 214], and Calcutta Club [(2019) 19 SCC 107] confirmed that a club or association and its members are not distinct persons for the purposes of taxation, and therefore no income arises from transactions between them. The Supreme Court laid down three essential tests for mutuality to apply:

(i) there must be complete identity between contributors and participants,

(ii) any surplus must not be distributed to members but instead applied toward the common purpose, and

(iii) the association must operate for a common purpose shared by all members.

This reasoning is further clarified in Income Tax Officer, Mumbai v. Venkatesh Premises Cooperative Society Ltd. [2018] 402 ITR 670 (SC), where the Court held that receipts such as non-occupancy charges, transfer charges, and contributions to common amenity funds collected from members were exempt from income tax since they were used solely for the collective benefit of the members, such as upkeep of premises, repairs, and provision of shared facilities. The Court also observed that any differential in contributions between existing and new members does not undermine the principle of mutuality, since once new members are admitted, they become part of the same class of contributors and beneficiaries. Ultimately, the Supreme Court’s dismissal of the Income Tax Department’s appeal in favor of the taxpayer society reinforced the enduring applicability of mutuality by establishing that receipts from members used exclusively for mutual benefit are not subject to income tax, and by extension, should not be subject to GST.

Supreme Court on the Principle of Mutuality & Income Tax Act 1961

Dated.- March 12, 2018

Venkatesh Premises Cooperative Society Ltd.

In the Supreme Court case of Venkatesh Premises Cooperative Society Ltd. (decided on March 12, 2018), the central issue was whether certain charges collected by cooperative societies from their members—such as non-occupancy charges, transfer fees, and common amenity fund contributions—should be taxed under income tax laws. The court examined this in light of the “doctrine of mutuality,” which holds that a person cannot make a profit from themselves; thus, transactions within a group of members for their mutual benefit are not considered income and are exempt from tax. The court concluded that as long as these charges are used solely for the common benefit of all members and there is a complete identity between contributors and beneficiaries, they are not taxable. Even if a surplus remains after covering expenses, it is still considered part of the common fund for future needs and not taxable income. However, if charges exceed prescribed limits or involve non-members, they may be subject to taxation.​ Housing societies in India collect various charges from residents to ensure smooth operation and maintenance of shared amenities and services. These charges are typically calculated based on factors like the size of the apartment (per square foot), equal distribution among units, or a hybrid model combining both approaches. Such charges are as under:

1. Regular Maintenance Charges: These are recurring fees collected monthly or quarterly to cover routine expenses. They include costs for cleaning common areas like lobbies and staircases, salaries for housekeeping and security staff, electricity for common facilities, and minor repairs to shared infrastructure such as elevators and water pumps.​

2. Special Maintenance Charges: These are one-time or occasional fees levied for significant repairs or upgrades, such as repainting the building, overhauling electrical systems, or major plumbing work.​

3. Sinking Fund: A reserve fund collected over time to finance future major repairs or infrastructure projects, ensuring the society can handle large expenses without sudden financial strain.​

4. Parking Charges: Fees for the use of designated parking spaces within the society premises. Charges may vary based on the type of vehicle and whether the parking spot is reserved or open.​

5. Non-Occupancy Charges: Additional charges levied on flats that are owned but not occupied by the owner, typically when rented out. These charges are capped at 10% of the service charges as per Maharashtra regulations.​

6. Property Tax Contributions: Some societies collect property tax from residents to make collective payments to local authorities, simplifying the process and ensuring timely compliance.​

7. Insurance Charges: Fees collected to insure the society’s buildings and common areas against risks like natural disasters, fire, or theft, providing financial security for residents.​

8. Cultural and Recreational Charges: Funds allocated for organizing community events, festivals, or recreational activities, fostering social engagement among residents. The Bombay High Court has upheld the legality of collecting such charges, provided they are approved by the society’s general body.​

9. Clubhouse and Recreational Facility Charges: Fees for the maintenance and operation of shared amenities like gyms, swimming pools, or community halls, ensuring these facilities remain functional and accessible.

Discriminatory Treatment:

The discrimination between the provisions of the Doctrine of Mutuality for club members, Resident Welfare Associations (RWAs), and the Income Tax Act arises from the distinct legal characterizations and policy frameworks applied to these entities under different tax regimes, despite their similarities in operation and structure. Let’s break down the key differences and the rationale behind the application of mutuality in each context:

Discrimination Between the Doctrine of Mutuality for Clubs, Resident Welfare Associations (RWAs), and the Income Tax Act

The Doctrine of Mutuality is the idea that when a group or association is formed for the mutual benefit of its members, the members and the association are treated as one entity for tax purposes. However, this idea is treated differently when it comes to clubs, Resident Welfare Associations (RWAs), and the Income Tax Act in India. Even though these groups are similar in structure, the way tax laws treat them varies

Differences in simple terms.

1. Mutuality and Clubs/Associations:

Legal Basis:

• Clubs and associations are formed for the benefit of their members. The law treats the club and its members as the same entity. This means when a club provides services to its members, like organizing events or offering facilities, it’s not seen as a taxable transaction. These services aren’t taxed because they are considered part of internal arrangements within the club.

Court Decisions:

• In important court cases like Bankipur Club (1997), Chelmsford Club (2000), and Calcutta Club (2019), the courts confirmed that when clubs provide services to their members, no tax is applied. The Supreme Court also ruled that clubs do not need to pay GST or income tax when they provide services to their members because the members and the club are treated as one.

2. Mutuality and RWAs:

Legal Basis:

• Resident Welfare Associations (RWAs) are similar to clubs in that they are also made up of members who contribute for the common benefit, like maintaining the building or common areas. However, the tax laws treat RWAs differently.
• RWAs are required to collect GST on monthly maintenance charges if they exceed ₹7,500 per member. This is because of a specific tax rule in Notification No. 12/2017–Central Tax (Rate), Entry 77.

Discriminatory Treatment:

• Even though RWAs work on the same idea of mutual benefit as clubs, they are treated differently by the tax authorities. RWAs are seen as service providers because they manage services like building maintenance and hire contractors. So, when maintenance charges are high, the government treats it as a taxable service, which leads to the GST being charged. This is different from clubs, where no tax is applied on services provided to members.

Policy Differences:

• There have been no major court rulings in favor of RWAs like those for clubs. Because of this, tax authorities treat RWAs as separate from their members and apply GST when maintenance charges are high, even though the association works in the same way as a club.

3. Mutuality and Income Tax:

Legal Basis:

• Under income tax law, the Doctrine of Mutuality has been consistently followed. This means that when members contribute to an association (like an RWA or cooperative society) for shared purposes, such as maintaining common areas, those contributions are not taxed.
• The Venkatesh Premises Cooperative Society Ltd. (2018) case showed that as long as the contributions are used for the benefit of members and not for personal profit, they are exempt from income tax.

Discriminatory Treatment:

• However, GST laws treat RWAs differently. Even though income tax doesn’t tax the contributions, GST applies when the monthly maintenance charges exceed ₹7,500. This difference happens because the income tax law sees the money as for mutual benefit, while GST law treats it as a taxable service.

Summary of How RWAs, Clubs, and Income Tax are Treated Differently:

1. Clubs/Associations:

• Clubs are fully covered by the mutuality principle. This means there is no tax on services provided to members, whether under income tax or GST.

2. RWAs:

• Although RWAs are similar to clubs, they are treated differently under GST. When the maintenance charges go above ₹7,500, GST is applied. This creates a discrepancy in how they are taxed compared to clubs.

3. Income Tax:

• The mutuality principle applies under income tax, meaning contributions made by members to RWAs for their shared benefit are not taxed.

4. The Path Forward:

Court Action Needed for RWAs:

4.1 There is a chance for the Kerala High Court’s ruling in Indian Medical Association (2025) to help apply the mutuality principle to RWAs, just as it applies to clubs. This could lead to a change in how GST is applied to RWAs, bringing them in line with clubs.

GST Changes:

4.2 GST laws need to be updated to reflect the mutuality principle. If the Supreme Court agrees that the mutuality principle applies to clubs, there could be a strong case to challenge the GST on RWAs.

 Final Words

Even though clubs and RWAs are both set up for the mutual benefit of their members, they are treated differently under tax laws. Clubs are fully exempt from GST and income tax on services provided to members, while RWAs face GST on maintenance charges over ₹7,500. This creates confusion and unfairness. The solution may lie in judicial intervention or changes to GST laws to treat RWAs in the same way as clubs for tax purposes.

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