Kerala HC Strikes Down GST on Club Services to Members
In a landmark ruling, the Kerala High Court has declared GST on club services to members as unconstitutional, shaking the very foundation of retrospective taxation introduced via the Finance Act, 2021. The verdict not only brings relief to associations but also sets a precedent in favor of constitutional integrity and taxpayer fairness.
📌 What Was the Controversy?
The 2021 amendment to the CGST Act brought in a controversial change:
- It inserted Section 7(1)(aa) and amended Section 2(17)(e).
- These defined transactions between clubs/associations and members as “supply” under GST—even retrospectively from 01.07.2017.
Key issue: This went against the principle of mutuality, where members and their clubs/associations are not seen as distinct legal entities for tax purposes.
🧑⚖️ Court’s Key Observations on GST on Club Services
Bench: Justice Dr Jayasankaran Nambiar & Justice S Easwaran
Case: Indian Medical Association Kerala Branch vs Union of India
| 🔍 Issue | ⚖️ Kerala HC Ruling |
|---|---|
| Taxable supply under amended CGST | Unconstitutional and ultra vires Article 246A |
| Retrospective effect from 2017 | Illegal and violates fairness and Rule of Law |
| Legislature redefining “supply” | Cannot override constitutional meaning defined under Article 366(12A) |
| Mutuality principle | Upheld – transactions within clubs/associations and members not taxable |
| Impact on associations like IMA | Exempted from GST demand for member services |
📚 Constitutional Grounds for the Verdict
- Article 246A: Grants power to levy GST, but “supply” must retain its natural and judicially accepted meaning.
- Article 366(12A): Defines “goods and services tax” – doesn’t permit artificial inclusion of deemed supply.
- Article 265: Tax can be levied only by authority of law – not by retrospective overreach.
🔁 Retrospective GST = Violation of Rule of Law?
The Court observed that retrospective amendments that burden taxpayers without prior notice or provision to recover tax from recipients are against fairness. It emphasized:
“A culture of justification, not authority, defines modern governance.”
This quote strongly reinforces constitutional expectations from the State to justify all actions, especially taxation.
🧠 Expert Insight: Mutuality Principle Still Holds Strong
The decision breathes new life into the doctrine of mutuality which had been side-lined post the 2021 amendment. As noted in previous rulings like:
- Bangalore Club v. CIT (SC, 2013) – mutuality negates profit motive and taxable character.
- Calcutta Club Ltd. v. UOI (SC, 2019) – upheld mutuality in context of service tax.
The Kerala HC judgment reiterates that a member and the association cannot contract with itself—a core principle at the heart of mutuality.
🧾 What Happens Next?
This decision:
- Invalidates tax demands raised on clubs and associations for the period from 01.07.2017 onward.
- Could influence pending cases across other High Courts and possibly reach the Supreme Court if appealed.
🧭 Key Takeaways for Clubs, Taxpayers, and Professionals
| ✅ Action Point | 💡 Recommendation |
|---|---|
| Clubs/Associations | Review GST payments made on member services from 2017 |
| Tax Professionals | Keep this precedent handy for GST disputes involving mutuality |
| GST Department | Likely to reconsider retrospective amendments in light of this ruling |
| Businesses | Stay alert for similar retrospective amendments in indirect tax laws |
📝 Final Thought
The Kerala High Court’s ruling is not just about GST on club services—it’s a strong message that taxation cannot override constitutional values, even with the Parliament’s power.
📌 For clubs, housing societies, and other associations – this could be a turning point in how member contributions are taxed under GST.