Ernakulam: The Kerala High Court has struck down the provisions of the Central Goods and Services Tax Act, 2017, which allowed the levy of GST on supply by clubs and associations to their members.

As per the 2021 amendment to the CGST Act, the definition of "supply" was amended to include within its fold "activities or transactions, by a person, other than an individual, to its members or constituents or vice versa, for cash, deferred payment or other valuable consideration." This amendment took effect retrospectively on June 1, 2017. 

A bench comprising Justice Dr Jayasankaran Nambiar and Justice S Easwaran has declared these provisions unconstitutional. The bench reasoned that the provision went against the definition of "supply" given under Article 246A of the Constitution.

"Accordingly the provisions of Section 2(17)(e) and Section 7(1)(aa) and the Explanation thereto of the CGST Act, 2017 and the provisions of Section 2(17)(e) and Section 7(1)(aa) and the Explanation thereto of the KGST Act are declared as unconstitutional and void being ultra vires the provisions of Article 246A read with Article 366 (12A) and Article 265 of the Constitution of India," the bench declared.

The bench also opined that giving the provisions a retrospective effect was illegal. The bench observed that altering the basis of taxation with retrospective effect when parties have not anticipated such a levy for the past period is against fairness and the rule of law.

The judgment was delivered in a writ appeal filed by the Indian Medical Association against the recovery of GST on the services the Association gave to its members. The IMA invoked the principle of mutuality to argue that the services rendered by a club or an association to its members are not taxable.

However, the non-taxability of services to members was removed by an amendment of the provisions of Section 2(17)(e) and Section 7(1)(aa) read with the Explanation thereto of the Central Goods and Services Tax Act, 2017 and the Kerala Goods and Services Tax Act, 2017 [KGST Act] that introduced deeming provisions making the supply of services by a Club/Association to its members a taxable supply for the purposes of the levy of tax. The amendment that was introduced through the Finance Act, 2021 was also made retroactive with effect from 01.07.2017. The IMA therefore challenged the constitutionality of these provisions.

The single judge upheld the provisions but ruled against the retroactive operation. Writ appeals were therefore filed by both the IMA, the Union and the State challenging the judgment to the extent it ruled against them.

The division bench, considering the writ appeals, noted that Article 246A of the Constitution, that confers simultaneous legislative powers on the Union and the States to make laws with respect to goods and service tax, uses the word “supply” without giving it an artificial meaning that would take in even a “deemed supply". Since the Constitution itself has defined the word 'supply' in a specific manner, it was not open to the legislatrue to ascribe a different meaning to the term.

The Court said that the concepts of “supply” and “service” as mentioned in the scheme of GST under the Constitution requires plurality of persons. This has been recognised in the Ranchi Chief Commissioner of Central Excise & Service Tax (2012) and the State of West Bengal & Ors. v Calcutta Club Ltd. (2019).

After the Constitution 46th Amendment Act, 1982, there is a concept of deemed sale. Thus, under Article 366(29A) a tax on the supply of goods by an incorporated association or body of persons to a member thereof for cash, deferred payment or other valuable was deemed to be a tax on the sale or purchase of goods. The Court agreed to the submission that even now, there is no concept of “deemed supply of service” in the Constitution. Further, the Court observed that the principle of mutuality has survived the 46th Amendment as observed in Calcutta Club.

The Court said that as long as Calcutta Club remains as a binding precedent, or the Constitution is not amended suitably to remove the concept of mutuality from concept of supply and service, the amendments to the CGST/ SGST Act should fail.
(With LiveLaw inputs)