GST Levy on Services Provided by Clubs to Members: Kerala High Court Declares Key Provisions Unconstitutional

By Abhishek Jat,Advocate

Introduction

The Kerala High Court, in a landmark judgment dated April 11, 2025, struck down Sections 2(17)(e) and 7(1)(aa) of the Central Goods and Services Tax Act, 2017 (CGST Act), holding them ultra vires the Constitution. The Division Bench, comprising Dr. Justice A.K. Jayasankaran Nambiar and Justice Easwaran S., ruled that the levy of GST on services provided by a club or association to its members is unconstitutional, as it violates the doctrine of mutuality and exceeds the legislative competence under Articles 246A and 366(12A) of the Constitution.

Background of the Case

The dispute arose when the Indian Medical Association (IMA), Kerala State Branch, challenged the constitutional validity of the retrospective amendments introduced by the Finance Act, 2021, which sought to tax transactions between a club and its members under GST.

The IMA argued that:

• A club and its members are not separate legal entities under the doctrine of mutuality.
• The Constitution does not permit taxation on self-supply or self-service, as GST requires a provider-recipient relationship.
• The retrospective amendment (effective from July 1, 2017) was arbitrary and confiscatory, violating Articles 14, 19(1)(g), 265, and 300A of the Constitution.

The Revenue Authorities (Union & State) defended the amendments, contending that:

• The legislature has the power to define "supply" expansively to include transactions between clubs and members.
• The retrospective application was merely clarificatory and within legislative competence.
• The doctrine of mutuality does not apply in the GST regime due to the statutory deeming fiction.

Key Legal Issues

1. Whether GST can be levied on services provided by a club to its members?
• The Court held NO, as the club and its members are not distinct entities under the doctrine of mutuality.
• The Constitution recognizes "supply" and "service" only where two separate parties exist.
2. Validity of Sections 2(17)(e) and 7(1)(aa) of the CGST Act:
• The Court ruled that Parliament cannot expand the constitutional meaning of "supply" to include self-service.
• Since Article 246A (GST levy power) is based on a dual-party transaction, the amendment was held ultra vires.
3. Retrospective Operation of the Amendment:
• The Court agreed with the Single Judge's finding that the retrospective levy was unfair and unreasonable, violating the Rule of Law.

Court’s Reasoning & Judgment

(1) Doctrine of Mutuality Prevails Over GST Amendments

• The Court relied on Supreme Court precedents like State of W.B. v. Calcutta Club Ltd. (2019) and Ranchi Club v. CCE (2012), which upheld that mutuality prevents taxation on self-supply.
• The 46th Constitutional Amendment (which taxed club-to-member goods supply) did not extend to services, meaning the mutuality principle still applied.
• The GST amendments sought to artificially deem clubs and members as separate entities, which the Court found beyond legislative competence.

(2) Constitutional Limitations on GST Levy

• Article 246A empowers GST levy only on "supply of goods/services", which inherently requires two distinct parties.
• The Court rejected the argument that Parliament could redefine "supply" to include self-service, as it would alter the constitutional scheme.
• The 46th Amendment precedent was cited, where Constitutional changes were needed to tax club transactions—mere statutory amendments were insufficient.

(3) Retrospective Levy Struck Down

• The Court upheld the Single Judge’s view that the retrospective tax demand (from 2017) was arbitrary and confiscatory.
• The IMA had not collected GST from members, making the demand unjust and unenforceable.

Conclusion & Implications

The Kerala High Court’s judgment reinforces that:
✅ Mutuality doctrine remains valid—clubs and members are not separate entities for GST.
✅ Constitutional provisions cannot be overridden by statutory amendments.
✅ Retrospective GST demands without prior notice are unfair and unconstitutional.

This ruling provides significant relief to clubs, associations, and mutual benefit societies, ensuring they are not taxed for internal member transactions. However, the government may appeal to the Supreme Court, making this a critical GST jurisprudence case.

Disclaimer: This analysis is presented for informational purposes only and does not constitute legal advice. Specific legal questions should be addressed to qualified legal counsel.