Club services to its members cannot attract GST: Kerala High Court

The Kerala High Court recently held that the services or welfare schemes extended by a club to its members cannot be taxed under Goods and Services Tax (GST) laws, while declaring GST amendments that sought to tax such transactions as unconstitutional [Indian Medical Association v Union of India & ors and connected cases].

In an April 11 ruling, a division bench of Justice AK Jayasankaran Nambiar and Justice Easwaran S has declared Sections 2(17)(e) and 7(1)(aa) of the Central GST Act, 2017 and the Kerala GST Act, and accompanying explanations, to be unconstitutional. 

These provisions, which were introduced in 2021, effectively deemed services given by a club to its members to be a taxable supply of services, on which GST could be imposed. 

The Court held that such provisions violated the limits set by the Constitution of India when it came to taxing services. 

The Court explained that the Constitution has understood a taxable supply of service to involve at least two distinct persons, a provider and a recipient. On the other hand, the services of a club only involves one legal entity (the club and, by extension, its members).

"When Constitution has understood a taxable transaction as necessarily involving two persons, can a legislature deem a transaction that does not involve two persons as a taxable transaction? … It can be safely assumed that the Scheme of GST under the Constitution … contemplates the existence of at least two persons - a provider and a recipient before one can infer either a ‘supply’ or a ‘service’ for the purposes of the levy (of a tax). In other words, the concepts of self-supply or self-service are not envisioned under the Constitution for the purposes of the levy," the Court said. 

The provisions under question were introduced by a legal amendment in 2021, but made effective retrospectively from 2017 onwards. 

The Kerala State Branch of the Indian Medical Association (IMA) challenged this amendment before the High Court. It also sought to restrain the GST authorities from taking any coercive against the IMA for not paying GST on fees received from IMA members to avail various services offered by the association. 

It feared that transactions concerning its mutual aid schemes such as a Social Security Scheme (SSS), Professional Disability Support Scheme (PDSS), and the Kerala Health Scheme would be retrospectively taxed under the amended provisions.

The IMA argued that any move to tax such services or schemes would violate principles of mutuality (which involves a concept that a person cannot profit from himself, thereby making such self-services exempt from tax).

In 2023, a single judge of the High Court upheld the amendment but declared that it could not be retrospective in its application. In other words, the single-judge held that the amendment could be give effect to for transactions from 2021 onwards. 

Both the IMA and the Union and State tax authorities filed appeals before the High Court's division bench. The IMA questioned the constitutionality of the amendment, while the government opposed the single-judge's view that the amendment could only have prospective effect. 

The division bench eventually ruled in the IMA's favour. It held that the government could not expand the meaning of a taxable supply of services beyond limits set by the Constitution, to cover transactions where there's no real exchange between two different parties.

The division bench added that IMA's schemes involved a collective pooling of resources by members for mutual benefits and did not involve any service provided from one person to another.

The Court further clarified that although the legislature may amend laws and define new taxable events, it cannot change the essential character of what is constitutionally envisaged to be a taxable 'supply' of services. 

"The amendment exercise carried out by the Parliament would itself have to be seen as unconstitutional since it incorporates a definition of supply that militates against the constitutional understanding of the term … Constitution cannot be statutorily expanded by any legislature since the power to legislate is itself one that is conferred by the Constitution," the Court said. 

Accordingly, the Court struck down the amendment to Sections 2(17)(e) and 7(1), as unconstitutional and violative of Article 246A read with Article 366 (12A) and Article 265 of the Constitution of India.

The Court added that since these provisions have been struck down, there was no need to examine whether they could have been applied retrospectively. 

However, it agreed with the single judge's view that retrospective taxation would have been unfair. 

"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," it said. 

The IMA was represented by Senior Advocate Arvind P Datar and assisted by Advocate PR Renganath.