"No GST on Services Provided by Clubs to Members: Kerala High Court Strikes Down Section 7(1)(aa) of CGST Act as Unconstitutional"
Safiya Malik
The High Court of Kerala Division Bench of Justice Dr. A.K. Jayasankaran Nambiar and Justice Easwaran S. declared that Section 2(17)(e) and Section 7(1)(aa) of the Central Goods and Services Tax Act, 2017, and the corresponding provisions of the Kerala Goods and Services Tax Act, 2017, are unconstitutional and void. Holding that the statutory provisions lacked legislative competence and were ultra vires Articles 246A, 366(12A), and 265 of the Constitution of India, the Court directed that no goods and services tax liability would arise on the supply of services by clubs and associations to their own members. The writ appeal filed by the petitioner was allowed with consequential reliefs, while the appeals filed by the Union of India and the State of Kerala were dismissed.
The petitioner, a State Branch of a professional association of medical practitioners, challenged the constitutional validity of amendments introduced through the Finance Act, 2021 to the Central Goods and Services Tax Act, 2017 (CGST Act) and the Kerala Goods and Services Tax Act, 2017 (KGST Act). These amendments inserted Section 7(1)(aa) along with an Explanation in the CGST Act and corresponding provisions in the KGST Act, deeming supplies of goods or services by clubs and associations to their own members as taxable supplies. Section 2(17)(e) was also inserted to expand the definition of "business" to include such services.
The petitioner was issued summons by the State GST Department requiring production of GST registration and audited financial statements for the financial years 2017–18 to 2021–22. It contended that services provided by an association to its members could not amount to "supply" under GST law, relying on the doctrine of mutuality, as upheld by the Supreme Court in State of West Bengal v. Calcutta Club Ltd. [(2019) 19 SCC 107].
The petitioner explained that it operated various welfare schemes for its members, including Social Security Schemes, Professional Disability Support Scheme, Professional Protection Scheme, Hospital Protection Scheme, Kerala Health Scheme, Pension Scheme, Mutual Benefit Schemes, and a Patient Care Scheme. Each scheme was independently administered, maintaining separate financial accounts.
Relying on judgments such as Graff v. Evans (1882) 8 QBD 373, Trebanog Working Men's Club and Institute Ltd. v. MacDonald (1940) 1 KB 576, Madras Gymkhana Club Employees' Union v. Gymkhana Club (1968) 1 SCR 742, and Cricket Club of India Ltd. v. Bombay Labour Union (1969) 1 SCR 600, the petitioner argued that the mutuality principle precluded taxation of transactions between clubs and their members.
It was submitted that the legislature lacked competence to treat members and their associations as distinct persons merely through statutory provisions, and unless the Constitution was amended suitably, the position affirmed by the Supreme Court would prevail.
The State authorities defended the amendments, contending that under Article 246A, legislatures had wide competence to define taxable events, and that GST law intentionally treated clubs and members as separate for tax purposes. It was argued that the Finance Act, 2021 merely clarified an existing liability, and that the doctrine of mutuality was no longer relevant in the GST regime.
The learned Single Judge, by judgment dated 23 July 2024, upheld the substantive validity of the amendments but held their retrospective application to be illegal. The petitioner filed Writ Appeal No.1659 of 2024 challenging the rejection of the constitutional challenge, while the Union of India and State of Kerala filed Writ Appeals No.1487 of 2024 and No.468 of 2025 challenging the invalidation of retrospectivity.
Before the Division Bench, the petitioners stated that the concept of mutuality was a constitutional principle not subject to ordinary legislative alteration. The respondents maintained that GST law was designed to comprehensively tax supplies irrespective of mutuality.
The Division Bench noted that the concepts of "supply" and "service" required the existence of two distinct persons — a provider and a recipient — for a transaction to be considered taxable. It referred to the Supreme Court’s decision in State of West Bengal v. Calcutta Club Ltd., which affirmed the survival of the mutuality principle even after the 46th Amendment to the Constitution.
The Court observed: "The concepts of 'supply' and 'service' having been judicially interpreted as requiring at least two persons – a provider and a recipient, for inferring their existence, and the Supreme Court having held in Calcutta Club that the principle of mutuality has survived the 46th amendment to the Constitution, so long as the said judgment holds sway as a binding precedent and/or the Constitution is not amended suitably to remove the concept of mutuality from the concepts of supply and service thereunder, the impugned amendment to the CGST/SGST Acts must necessarily fail the test of constitutionality."
The Bench rejected the argument that economic legislation enjoys unfettered latitude, distinguishing cases such as State of Madhya Pradesh v. Rakesh Kohli [(2012) 6 SCC 312] and Parmar Samanthsingh Umedsingh v. State of Gujarat [(2022) 15 SCC 364]. It found that the impugned provisions suffered from a clear lack of legislative competence, stating: "We do however find that the statutory provisions impugned in these proceedings suffer from a definitive lack of legislative competence."
Turning to the retrospective application of the provisions, the Court noted that, given its finding of unconstitutionality, there was no need to independently adjudicate that issue. Nonetheless, it agreed with the learned Single Judge’s conclusion that retrospective taxation without fairness would violate the Rule of Law. It observed: "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."
The Court stated the State’s obligation to offer valid justification for any action infringing citizens’ constitutional rights and found no such justification offered in this case.
The High Court declared that Section 2(17)(e) and Section 7(1)(aa) of the Central Goods and Services Tax Act, 2017, and the corresponding provisions of the Kerala Goods and Services Tax Act, 2017, together with their Explanations, are unconstitutional and void. The Court found the impugned provisions ultra vires the Constitution, specifically Articles 246A, 366(12A), and 265.
Writ Appeal No.1659 of 2024 filed by the petitioner was allowed with consequential reliefs. Writ Appeals No.1487 of 2024 and No.468 of 2025 filed by the Union of India and the State of Kerala respectively were dismissed. No order was made as to costs.
Advocates Representing the Parties
For the Petitioners: Senior Advocate Sri Arvind P. Datar, Advocate Sri P.R. Renganath, Advocate Sri George Varghese (Perumpallikuttiyil), Advocate Sri Manu Srinath, Advocate Sri Nimesh Thomas, Advocate Sri Lijo John Thampy.
For the Respondents: Additional Solicitor General Sri AR.L. Sundaresan, Special Government Pleader (Taxes) Sri Mohammed Rafiq, Standing Counsel for GST Intelligence Sri Sreelal N. Warrier, Central Government Counsel Sri Shaiju K.S.
Case Title: Indian Medical Association Kerala State Branch v. Union of India and Others
Neutral Citation: 2025:KER:30517
Case Number: W.A. No. 1659 of 2024, W.A. No. 1487 of 2024, and W.A. No. 468 of 2025
Bench: Justice Dr. A.K. Jayasankaran Nambiar and Justice Easwaran S.
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