GST on Resident Welfare Associations: Analysis of Indian Medical Association Judgment

Analysis of Indian Medical Association Judgment in the context of its Impact for GST levy on Resident Welfare Associations

Indian Medical Association Vs Union of India (Kerala High Court); W.A. No.1659 of 2024; 11/04/2025

Introduction

The Honorable Kerala High Court in a recent judgement relating to the case of Indian Medical Association vs. Union of India (April 2025) (referred to as IMA Judgement from now on) has reinvigorated the discussion on the applicability of Goods and Services Tax (GST) to member-based organizations, where the services are rendered by the Associations / Clubs to their members. This landmark ruling has potentially challenged the constitutional validity of certain provisions of the GST law, more particularly the retrospective insertion of Section 7(1)(aa) of the Central Goods and Services Tax Act, 2017. By upholding the doctrine of mutuality, the court has plausibly rewritten the tax implications for the services rendered by the Association / Club to its Members across the country. This analysis examines the judgment’s legal foundations, its alignment with previous Supreme Court decisions, and its impending impact on the GST framework for Resident Welfare Associations. Let us examine the Key Findings and Legal Reasoning of the judgement in the case of Indian Medical Association vs. Union of India (W.A.NO.1659 OF 2024) dated 11th April 2025 and thereafter proceed to analyse its impact on the levy of GST on Residents’ welfare Associations.

Background of the Case

The Indian Medical Association (IMA) challenged the validity of Section 7(1)(aa) of the CGST Act, 2017, which was inserted with retrospective effect from July 1, 2017, by the Finance Act, 2021 vide Notification No. 39/2021-C.T., dated 21st December, 2021 reads thus:-

“Sec: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”

This provision explicitly brought transactions between an association and its members within the ambit of “supply” under GST, effectively nullifying the doctrine of mutuality that had been upheld by the honorable courts, in several disputes.

In the case under reference now, the Honourable Kerala High Court in its final order has struck down the provisions of Section 7(1)(aa) of the CGST Act 2017 as unconstitutional, holding that:

• In terms of the principle of mutuality, an entity cannot make a supply to itself. Since members collectively constitute the association, transactions between them lack the essential element of duality required for a taxable supply and upheld the “Doctrine of Mutuality”.
• Further, Article 366(12A) of the Constitution defines GST as a tax on the “supply” of goods or services from one person to another. The court emphasized that for a valid taxable transaction, there must be two distinct parties—a supplier and a recipient.
• The retrospective amendment was deemed as an attempt to artificially create a taxable event where none existed, probably exceeding the legislative competence accorded under the Constitution.

and that

• No service can be rendered by an association to its own members as they are part of the same entity, echoing the established principle that “one cannot make a profit from oneself.”

The doctrine of mutuality is a well-established legal principle that has been consistently upheld by the Supreme Court of India in several landmark judgments:

1. CIT v. Bankipur Club Ltd. (1997)

The Supreme Court of India’s decision in Commissioner of Income Tax, Bihar v. Bankipur Club Ltd. (1997 INSC 498) is a landmark judgment that delves into the application of the doctrine of mutuality in the context of taxation of members’ clubs. In this case, it was held that when a group of persons associate together and contribute to a common fund for mutual benefit, any surplus arising from such contributions cannot be regarded as income. The Court observed:

“The basic concept is that a person cannot trade with himself… The contributors to the common fund and the participators in the surplus must be identical.”

2. Bangalore Club v. Commissioner of Income Tax (2013)

In this case it was the question of law whether the principle of mutuality applied to funds deposited by the said club in four nationalised banks who were also members of the club, especially when the fund was raised from the contribution of several members, including the four banks, and the interest derived from it is visualised by several members of the assesses club. The Court outlined three conditions for the principle of mutuality to apply. (i) A Complete identity between contributors and participants, (ii) all the Actions of the association based on the mandate of members, and (iii) there is no scope of profiteering by contributors from a fund made by them. The Supreme Court reaffirmed the principle of mutuality, stating:

“The theory of mutuality is based on the common law dictum that a man cannot trade with himself. No one can profit from himself; the substance being that, in such a case, there is no contract upon which a profit can arise.”

3. State of West Bengal v. Calcutta Club Limited (2019)

In State of West Bengal v. Calcutta Club Limited (2019), the Supreme Court ruled that services provided by a club to its members are not taxable, as they are considered services to itself under the Finance Act, 1994. This decision is based on the principle of mutuality, where the club and its members are considered to be part of the same entity. This judgment was particularly significant as it dealt specifically with the applicability of indirect taxes (service tax) to member clubs. The Supreme Court held that the doctrine of mutuality continues to apply to incorporated clubs after the 46th Amendment to the Constitution of India. The Court clarified that despite amendments to Article 366 of the Constitution, the doctrine of mutuality remained valid because the relationship between the club and its members was not one of a supplier and recipient but of mutual participation.

The GST Framework for RWAs: Pre-IMA Judgment

Be it as it may, that we have analyzed the IMA judgment it is natural to equate it to the liability of GST for Resident Welfare Associations -RWAs.  But, before that, it is important to understand what is the existing framework for levy of GST on Resident Welfare Associations (RWA). The important reference should be invited to Notification No. 12/2017-Central Tax (Rate),dt. 28th June 2017 as amended vide notification No. 2/2018- Central Tax (Rate), dated 25.01.2018. As per Entry No. 77 of this notification, GST exemption is available to services provided by RWAs to their members where the contribution on Monthly maintenance Charges is up to Rs. 7,500 per month per member, (earlier it was Rs.5000/-) provided the annual turnover of the RWA does not exceed Rs. 20 lakhs.

Further, CBIC circular no. 109/28/2019-GST dated 22^nd July 2019 clarified several aspects regarding GST on RWAs wherein it has categorically emphasized that:

• If the monthly contribution exceeds Rs. 7,500, the entire amount becomes taxable at 18%, not just the excess over Rs. 7,500.
• The exemption threshold of Rs. 20 lakh applies to the aggregate turnover of the RWA.
• RWAs providing services to non-members or commercial entities are subject to GST.

The retrospectively inserted provision Section 7(1)(aa) of the CGST Act 2017 explicitly stated:

“The activities or transactions, by a person, other than an individual, to its members or constituents or vice-versa, shall be treated as supply of goods or services if such activities or transactions are for cash, deferred payment or other valuable consideration.”

This provision was specifically designed to overcome the judicial pronouncements upholding the doctrine of mutuality, particularly the judgment in the Calcutta Club Limited case.

Decision in the IMA case for RWAs

Nevertheless, the honorable Kerala High Court’s decision in the IMA case has far-reaching implications for RWAs across India:

• The judgment directly questions based on the Principles of Mutuality, the constitutional validity of GST being levied on maintenance charges collected by RWAs from their members. If the principle of mutuality applies equally to RWAs (as it should), then the collection of maintenance charges from members would not constitute a “supply” under GST.
• The court’s interpretation of “supply” under Article 366(12A) reinforces that a valid taxable transaction requires two distinct parties. In the case of RWAs, the members collectively form the association, erasing the duality required for a taxable supply.
• By striking down Section 7(1)(aa), the court has removed the legal basis for treating transactions between an RWA and its members as taxable supplies. This potentially exempts all maintenance charges collected by RWAs from GST, regardless of the amount.
• The current exemption threshold of Rs. 7,500 per month per member was based on the presumption that maintenance charges constitute a “supply” under GST. With the IMA judgment challenging this fundamental presumption, the threshold itself becomes legally questionable and redundant.

To determine whether the doctrine of mutuality applies to RWAs, we must examine whether they meet the three conditions outlined in the Bangalore Club case. In a typical RWA, all members contribute to the common fund, and the benefits (maintenance services, security, etc.) are enjoyed by all members. This satisfies the first condition of complete identity between Contributors and Participants. The RWAs operate based on the collective decisions of their members, usually through general body meetings and elected managing committees. The actions of the RWA are, therefore, based on the mandate of its members. Finally, RWAs are typically non-profit entities, with any surplus being used for the collective benefit of all members. There is no distribution of profits to members, and there is No Scope of Profiteering satisfying the third condition.  Given that RWAs generally satisfy all three conditions, the doctrine of mutuality should apply to them, rendering transactions between the RWA and its members outside the purview of GST.

Comparative Global Jurisprudence

The concept of mutuality has been recognized in tax jurisprudence across common law countries.  In United Kingdom, in the case of Fletcher v. Income Tax Commissioner (1971), the House of Lords held that for a transaction to be taxable, there must be a trading activity with a third party, not with members of the same entity. In Australia, while deciding a dispute in the case of The Commissioner of Taxation v. The Bohemians Club (1918) the honourable High Court of Australia ruled that the principle of mutuality excludes from income any amount derived by a club from its members, while in New Zealand too the Court of Appeal emphasized that under the principle of mutuality, an association cannot derive income from itself while deciding the case regarding Commissioner of Inland Revenue v. Picton Yacht Club Inc. (1985). These international precedents reinforce the Kerala High Court’s interpretation of the doctrine of mutuality and its application to member associations.

The Recent judicial pronouncements in similar cases provide additional context over the issue.

(a) Venkatesh Premises Co-operative Society Ltd. v. Commissioner of CGST (2023)

The Honorable Court upheld the principle of mutuality, ruling that receipts by a co-operative society from its members for various charges (like non-occupancy, transfer, and common amenity fund charges) are not taxable under the Goods and Services Tax (GST) as long as they are used for the common benefit of the members. The court emphasized that these receipts are not generated for profit or commercial purposes but are used for the society’s maintenance, infrastructure, and provision of common amenities.

(b) Federation of Cooperative Housing Societies v. Union of India (2022)

The Delhi High Court issued notices to the government on a petition challenging the constitutional validity of GST on housing societies, acknowledging the relevance of the mutuality principle.

(c)Bangalore Apartments Federation v. Union of India (2024)

The Karnataka High Court stayed the recovery of GST from apartment associations pending the final decision on the applicability of the doctrine of mutuality.

These cases highlight the evolving nature of jurisprudence on this issue and underscore unequivocally the necessity for a definitive Supreme Court decision.

Before bidding adieu…..

The Government may face a significant loss of revenue if all RWAs are exempted from GST. Therefore Government is likely to take the appeal route to the Apex Court.  Given the significance of the issue and the potential revenue implications, it is almost certain that the Union of India will appeal the Kerala High Court’s decision. Until the Supreme Court decides the matter finally, RWAs may face a dilemma regarding GST compliance. Conservative RWAs might continue collecting and paying GST, while others might stop based on the Kerala High Court judgment. While deciding the issue, the Supreme Court will need to balance several important considerations, like

• The Court must determine whether the definition of “supply” under Article 366(12A) necessarily requires two distinct parties.
• The Court will have to examine whether Parliament’s intent in enacting the GST laws was to include member associations within the tax net.
• The Court must ensure consistency with its previous judgments, particularly the Calcutta Club Limited case, while deciding Tax liability, wherein it ruled that services provided by a club to its members are not taxable

The Supreme Court’s verdict will be very crucial in determining the long-term implications.

Jai Hind!!!!