-CA. Bhanu Prudhviraj
-V.J. Gayathry Sindu
In a landmark judgment, the Kerala High Court ruled in favor of the Indian Medical Association (IMA), declaring Section 7(1) (aa) of the Central Goods and Services Tax (CGST) Act, 2017 as unconstitutional in its application to transactions between clubs/associations and their members. This decision marks a significant reaffirmation of the doctrine of mutuality, a foundational concept in tax law, and provides relief to countless associations and clubs across India.
Background of the Case
The Indian Medical Association, a registered body comprising medical professionals, filed a writ petition challenging the imposition of Goods and Services Tax (GST) on payments made by its members in the form of admission fees, annual subscription fees, and contributions to various welfare schemes such as the Social Security Scheme, Professional Disability Support Scheme, and Professional Protection Scheme.
The core of the dispute revolved around the validity of Section 7(1)(aa) of the CGST Act, which was inserted through Section 108 of the Finance Act, 2021, with retrospective effect from 1st July 2017. This provision sought to treat transactions between a person (other than an individual) and its members as a taxable supply, thereby overriding the previously accepted understanding of mutuality.
Key Legal Issues Considered
a) Principle of Mutuality
The High Court’s judgment heavily relied on the principle of mutuality, which holds that an entity cannot make a supply to itself. Since clubs and associations are formed by their members and for their collective benefit, there is no distinction between the association and its members.
The basic feature common in sales and services was that both required the existence of two parties. Reliance in this regard is placed in the decisions of Ranchi Club and Calcutta Club cases. In other words, the concepts of self-supply or self-service were neither envisioned under Article 246A of the constitution nor by giving artificial meaning under “deemed supply”. Therefore, such transactions lack the element of duality necessary to constitute a “supply” under GST law.
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 noted that in the case of clubs and their members, this duality does not exist. Since the association and its members are considered the same entity, GST cannot be levied on such internal transactions.
Thus, the relationship between clubs and their members is not one of service provision, but of internal mutual benefit, thereby not attracting the provisions of GST.
b) Artificial broadening of tax bases without constitutional backing
The court observed that legislative body derives its legislative competence to enact a statute from the constitution (Article 265), they cannot give to the word/ concept a meaning that goes against the meaning assigned to the same word/concept in the context of setting under the constitution.
Earlier, when the state legislatures attempted to broaden the tax net beyond the meaning of word ‘sale’ in Entry 54 of List II of the seventh schedule to the constitution. The said attempts were struck down by the Supreme Court. The same were overcome by the legislature by adding six sub-clauses (a) to (f) under Article 366(29A) of the constitution.
In the present case, the Statutory provision inserted Section 7(1) (aa) retrospectively from 1 July 2017, which:
- Deems members and their clubs/associations to be separate persons.
- Treats transactions between them as taxable “supplies”.
This is a legal fiction that attempts to expand the scope of what constitutes “supply” without constitutional amendment. The above Section 7(1)(a)(a) amendment overreach constitutional limits, as it tries to alter the meaning of a constitutional term (“supply”) through legislation without legislative competence.
The insertion of Section 7(1) (aa) fails the test of constitutionality as it:
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c) Retrospective Legislation
In light of the findings with regard to the unconstitutionality of the impugned statutory provisions, divisional bench of Kerala high court did not go into the validity of retrospective operation of impugned statutory provision However, the Court agreed with the findings of single judge that retrospective taxation must pass the test of reasonableness and fairness. Laws that are confiscatory or that overturn long-standing legal principles cannot be upheld merely through legislative amendments.
This part of the ruling underscores the judiciary’s role in safeguarding individuals and associations from arbitrary and excessive legislative actions. The Court emphasized that retrospective laws, especially in the realm of taxation, must not be used as tools to override judicially recognized doctrines or impose liabilities that were previously non-existent.
Conclusion
The Kerala High Court’s decision is a major victory for the Indian Medical Association and similar bodies functioning under the doctrine of mutuality. The Court reaffirmed that:
- The principle of mutuality remains valid and applicable, even in the GST era.
- Associations and their members are not two separate persons under GST law.
- Retrospective taxation must be reasonable and cannot override fundamental legal doctrines.
This ruling is expected to have wide-ranging implications for clubs, societies, trade unions, and professional bodies across India that operate on a mutual basis. It also raises important questions on the scope and limits of retrospective taxation in a constitutional framework.
(the views expressed in this article are strictly personal and cannot be considered as legal opinion in case of any query. The author of this article can be reached at caprudhvigst@gmail.com)
Author Bio
Such cases are good for reading and understanding the interpretational analogy. However, there is supreme court at the next level and the GST council is waiting to make a retrospective legislative amendment. Would u agree?