Kerala High Court Strikes Down GST Act Provision Which Levied Tax On Supplies By Clubs/Associations To Members

In a significant judgment, the Kerala High Court has struck down the provisions of the Central Goods and Services Tax Act, 2017, which allowed the levy of GST on supply by clubs and associations to its members.

As per the 2021 amendment made to the CGST Act, the definition of "supply" was amended to include within its fold "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." Also, this amendment was given a retrospective effecf from 01.07.2017.

A bench comprising Justice Dr Jayasankaran Nambiar and Justice S Easwaran has declared these provisions to be unconstitutional. The bench reasoned that the provision went against the definition of "supply" given under Article 246A of the Constitution.

"Accordingly the provisions of Section 2(17)(e) and Section 7(1)(aa) and the Explanation thereto of the CGST Act, 2017 and the provisions of Section 2(17)(e) and Section 7(1)(aa) and the Explanation thereto of the KGST Act are declared as unconstitutional and void being ultra vires the provisions of Article 246A read with Article 366 (12A) and Article 265 of the Constitution of India," the bench declared.

The bench also opined that the giving of retrospective effect for the provisions was also illegal. The bench observed that altering the basis of taxation with retrospective effect, when parties have not anticipated such a levy for the past period, is against fairness and the rule of law.

"The insertion of a statutory provision that alters the basis of indirect taxation with retrospective effect, so as to tax persons for a prior period when they had not anticipated such a levy and, consequently, had not obtained an opportunity to collect the tax from the recipient of their services, militates against the concept of Rule of Law. On its part, the State too would be found wanting in offering a valid justification for it's legislative action. Over the last seven decades since the adoption of our Constitution, the guarantees therein have been ensured to our citizenry through progression from a culture of authority to a culture of justification. Accordingly, in modern times the State is obliged to offer justification for all its actions that touch upon the constitutional rights, fundamental and otherwise, of its citizens. We do not find any such justification for the retrospective operation of the impugned statutory provisions."

The judgment was delivered in a writ appeal filed by the Indian Medical Association against the recovery of GST on the services given by the Association to its members. The IMA invoked the principle of mutuality to argue that the services rendered by a club or an association to its members are not taxable.

However, the non-taxability of services to members was removed by an amendment of the provisions of Section 2(17)(e) and Section 7(1)(aa) read with the Explanation thereto of the Central Goods and Services Tax Act, 2017 and the Kerala Goods and Services Tax Act, 2017 [KGST Act] that introduced deeming provisions making the supply of services by a Club/Association to its members a taxable supply for the purposes of the levy of tax. The amendment that was introduced through the Finance Act, 2021 was also made retroactive with effect from 01.07.2017. The IMA therefore challenged the constitutionality of these provisions.

The single judge upheld the provisions but ruled against the retroactive operation. Writ appeals were therefore filed by both the IMA, the Union and the State challenging the judgment to the extent it ruled against them.

The division bench, considering the writ appeals, noted that Article 246A of the Constitution, that confers simultaneous legislative powers on the Union and the States to make laws with respect to goods and service tax, uses the word “supply” without giving it an artificial meaning that would take in even a “deemed supply". Since the Constitution itself has defined the word 'supply' in a specific manner, it was not open to the legislatrue to ascribe a different meaning to the term.

"What we are confronted with in these proceedings is a situation where the statutory exercise undertaken by the legislative body has given a meaning to a word/concept therein that differs from the accepted meaning of the same word/concept under the Constitution. We are of the view that when a word/concept in the Constitution has been interpreted by the Supreme Court in a particular manner, a legislative body, that derives its legislative competence to enact a Statute from the Constitution, cannot give to the word/concept a meaning that goes against the meaning assigned to the same word/concept by the Supreme Court in the context of its setting under the Constitution. This is especially so because, when used in the Constitution in a particular sense, it is that sense of the word/concept that determines the very competence of the legislature to enact a law in relation to the subject represented by that word/concept."

Appearances | For IMA : Senior Advocate Arvind P Datar, Advs George Varghese (Perumpallikuttiyil), Manu Srinath, Nimesh Thomas, Lijin Thampy

For Union : ARL Sundaresan, Addl Solicitor General

For State : Mohammed Rafique, Special Govt Pleader (Taxes)

Case : Indian Medical Association Kerala Branch vs Union of India