Kerala High Court Declares GST on Club-Member Transactions Unconstitutional

Introduction

In a landmark decision, the Kerala High Court has declared certain provisions of the Central Goods and Services Tax (CGST) Act, 2017, unconstitutional. These provisions pertained to the levy of Goods and Services Tax (GST) on transactions between clubs or associations and their members. The court's ruling has significant implications for the interpretation of tax laws concerning mutual associations and their financial dealings with members.

Background of the Case

The controversy centered around the 2021 amendment to the CGST Act, which introduced Section 7(1)(aa). This section expanded the definition of "supply" to include transactions between a person (other than an individual) and its members or constituents, for consideration. Notably, this amendment was given retrospective effect from July 1, 2017, the date when the CGST Act originally came into force.

The Indian Medical Association (IMA), among other petitioners, challenged this amendment, arguing that it violated the principle of mutuality. Under this principle, a person cannot make a supply to themselves; hence, transactions between an association and its members should not be considered taxable supplies. The petitioners contended that the retrospective application of the amendment was unjust and unconstitutional.

Court's Analysis and Findings

The Kerala High Court, comprising Justice Dr. Jayasankaran Nambiar and Justice S. Easwaran, undertook a detailed examination of the constitutional provisions and the CGST Act. The court observed that:

1. Violation of Constitutional Provisions: The amendment was found to be in contravention of Article 246A, which grants the power to levy GST, and Article 366(12A), which defines "goods and services." The court held that the retrospective inclusion of transactions between associations and their members as taxable supplies was beyond the legislative competence and violated Article 265, which mandates that no tax shall be levied or collected except by the authority of law.

2. Principle of Mutuality: The court reaffirmed the principle of mutuality, emphasizing that an association and its members are not distinct entities in the context of mutual transactions. Therefore, treating such transactions as taxable supplies was inconsistent with established legal principles.

3. Retrospective Application: The retrospective effect of the amendment was deemed arbitrary and violative of the rule of law. The court noted that imposing tax liabilities retrospectively, especially when associations had not anticipated such levies and had not collected tax from members, was unjust.

Implications of the Judgment

The court's decision has several significant implications:

• Invalidation of Tax Demands: Tax demands raised under the invalidated provisions for the period from July 1, 2017, to the date of the judgment are now unenforceable.

• Reaffirmation of Mutuality: The judgment reinforces the legal doctrine that mutual associations and their members are the same entity concerning mutual transactions, thereby exempting such transactions from GST.

• Legislative Caution: The ruling serves as a cautionary tale for the legislature against enacting retrospective tax laws that can disrupt settled expectations and violate constitutional principles.

Conclusion

The Kerala High Court's decision marks a pivotal moment in the interpretation of GST laws concerning mutual associations. By declaring the retrospective taxation of transactions between clubs or associations and their members unconstitutional, the court has upheld the sanctity of the principle of mutuality and reinforced the importance of legislative adherence to constitutional mandates. This judgment not only provides relief to numerous associations across the country but also sets a precedent for future legislative actions in the realm of taxation.

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