No GST On Services Provided By Clubs/Associations To Their Members, S.7(1)(aa) of CGST Act:Kerala HC

Summary

The Kerala High Court recently ruled on the constitutional validity of Section 7(1)(aa) of the Finance Act 2021, which retroactively imposed GST on services provided by clubs and associations to their members. The court struck down these provisions, citing their violation of the principle of mutuality established in previous rulings, such as *Kolkata Club Limited*. The judgment emphasized the need for a constitutional amendment if the government intends to apply GST on such services in the future. The decision underscores the importance of fairness and the rule of law, particularly regarding retrospective taxation.

Takeaways

• 😀 The Kerala High Court struck down the constitutional validity of Section 7(1)(aa) and Section 2(17)(e) of the GST Act, which were inserted by the Finance Act of 2021 and applied retrospectively from July 1, 2017.
• 😀 The retrospective insertion of provisions in the GST Act was seen as nullifying the principle of mutuality, which was previously upheld in the Kolkata Club Limited case by the Supreme Court.
• 😀 The principle of mutuality emphasizes that one cannot provide services to oneself, which requires a plurality of persons to establish a valid service under GST.
• 😀 The Kerala High Court held that the retrospective application of GST provisions, which began in 2017, was unconstitutional and violated multiple articles of the Indian Constitution, including Articles 246A, 366(12A), and 265.
• 😀 The court pointed out that imposing retrospective GST was unfair and contrary to the rule of law, as clubs and associations could not have anticipated collecting GST from members for past periods.
• 😀 The court emphasized that the state must provide justification for any laws that infringe upon citizens' constitutional rights, particularly regarding retrospective taxation.
• 😀 The division bench of the Kerala High Court overturned the single-member bench's decision, which had upheld GST on services provided by clubs to their members, ruling that such services were not taxable.
• 😀 The judgment reinforces that the Kolkata Club case remains a binding precedent on the principle of mutuality, which survives even after the 46th amendment to the Constitution in 1982.
• 😀 The Kerala High Court clarified that until the Constitution is amended to remove the principle of mutuality, or until Kolkata Club is overturned, the retrospective application of GST will fail.
• 😀 The Kerala High Court's ruling is significant for clubs and associations, as it eliminates the possibility of GST being levied on services provided to their members under the principle of mutuality.

Q & A

What is the main issue discussed in the Kerala High Court judgment?

The main issue discussed in the judgment is whether the GST is applicable to the services provided by clubs or associations to their members, particularly in light of a retrospective amendment to the GST law by the Finance Act of 2021.

What did the Kerala High Court rule regarding the constitutional validity of Section 7(1)(aa) of the GST Act?

The Kerala High Court ruled that Section 7(1)(aa) and the related provisions were unconstitutional and void, particularly when applied retrospectively, as they violated several constitutional articles.

How did the court interpret the principle of mutuality in this case?

The court upheld the principle of mutuality, which asserts that one cannot provide services to oneself. It concluded that for a service to qualify as a 'supply' under GST, there must be plurality of persons involved, which was in line with the previous Supreme Court judgment in the Kolkata Club case.

Why did the court find the retrospective application of the law to be unfair?

The court found the retrospective application of the GST provision unfair because it applied to services already provided before the amendment, and clubs and associations had not collected GST for those past transactions. This was seen as contrary to the principles of fairness and the rule of law.

What does the court say about the state's obligation when making retrospective legal changes?

The court stated that the state must justify any retrospective legal changes that affect citizens' constitutional rights, but in this case, no such justification was provided for the retrospective application of the GST provisions.

How did the court rule regarding the applicability of the Kolkata Club case precedent?

The court ruled that as long as the Kolkata Club case remains a binding precedent and unless the Constitution is amended to remove the principle of mutuality, the retrospective GST provision would remain invalid. This principle must be respected in the context of services provided by clubs to their members.

What was the outcome of the appeal filed by the Indian Medical Association (IMA)?

The Division Bench allowed the appeal filed by the Indian Medical Association (IMA), overturning the Single Bench's judgment that had found the supply of services by clubs to their members taxable under GST.

Why did the court mention the retrospective effect of the GST provisions as a problem?

The court expressed concern that the retrospective effect of the provisions, made applicable from July 1, 2017, violated fairness and the rule of law, as it imposed taxes on past transactions that were not anticipated by the affected parties.

What does the judgment say about the relationship between GST law and the Constitution of India?

The judgment stated that the retrospective GST provisions were ultravires (beyond the powers) of the Constitution, violating Article 246A, which grants power to both central and state governments to legislate on GST, and Article 265, which ensures that taxes must be collected according to the law.

What broader principle does this case reinforce about tax law and fairness?

This case reinforces the principle that laws, especially tax laws, should not be applied retroactively unless there is a clear justification, as doing so could infringe on fairness, legal certainty, and constitutional rights.