In a major decision, the Kerala High Court has ruled that the provisions of the Central Goods and Services Tax (CGST) Act and Kerala Goods and Services Tax (KGST) Act that imposed GST on services rendered by clubs and associations to their members are unconstitutional. The verdict was delivered by a division bench comprising Justice Dr. A.K. Jayasankaran Nambiar and Justice Easwaran S. on April 11, 2025.
Background of the Case
The Indian Medical Association (IMA), Kerala State Branch, had approached the High Court after receiving summons from GST intelligence units seeking details about its registration and financial records from 2017-18 to 2021-22. The IMA feared coercive recovery of GST on various mutual schemes it operated for its member doctors.
The IMA argued that the services provided to its members under mutual benefit schemes, including Social Security, Disability Support, Protection Schemes, and others, fall under the principle of mutuality and therefore cannot be treated as a taxable supply.
Despite a 2021 amendment to the CGST Act, which added Section 7(1)(aa) to expand the scope of "supply" to include services from clubs to their members, the IMA challenged the legality of this amendment—especially its retrospective effect from 1st July 2017.
“Accordingly, the provisions of Section 2(17)(e), Section 7(1)(aa), and the Explanation thereto in the CGST and KGST Acts are declared unconstitutional and void being ultra vires Article 246A read with Article 366(12A) and Article 265 of the Constitution of India,” the division bench stated.
The principle of mutuality treats the association and its members as the same entity. This principle has been recognized for decades by courts, including in the landmark Supreme Court judgment in State of West Bengal v. Calcutta Club Ltd (2019).
The bench emphasized that the Constitution, through Article 246A, confers power to legislate GST only on actual supplies between distinct entities. Since mutuality implies that clubs and their members are not separate entities, the legislature cannot redefine this through statutory provisions.
“When a word/concept in the Constitution has been interpreted by the Supreme Court in a particular manner, the legislature cannot assign it a different meaning through statute,” the Court explained.
The Court also struck down the retrospective nature of the 2021 amendment which attempted to impose tax from July 1, 2017, onwards. The bench found such retrospective application unfair and contrary to the rule of law.
“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, militates against the concept of Rule of Law,” the Court observed.
- The Constitution's use of the term “supply” under Article 246A implies two separate entities.
- The GST Council and Legislature cannot override constitutional provisions through deeming fictions.
- The amendment introduced by the Finance Act, 2021 effectively tried to impose a new tax in the guise of a clarification.
- Clubs and associations, whether incorporated or not, cannot be artificially treated as separate from their members without a constitutional amendment.
The Court relied heavily on the precedent set by the Supreme Court in Calcutta Club and Ranchi Club, which upheld the principle of mutuality even after the 46th Constitutional Amendment.
The Union and State governments argued that Article 246A gives them unrestricted power to define taxable supply and to treat clubs and their members as separate entities. However, the Court found no merit in these claims, holding that:
- The term "supply" used in the Constitution cannot be artificially expanded by statutory definitions.
- The mutuality principle is a well-established constitutional doctrine and cannot be nullified without a constitutional amendment.
- Retrospective application of the amendment was arbitrary, excessive, and without valid justification.
“In modern times, the State is obliged to offer justification for all its actions that touch upon the constitutional rights, fundamental and otherwise, of its citizens. We do not find any such justification for the retrospective operation of the impugned statutory provisions,” the Court remarked.
This judgment is a significant victory for clubs and associations across India. It reaffirms the sanctity of the mutuality principle and the limits of legislative power under Article 246A. It also sends a clear message that retrospective taxation, especially one that imposes heavy liabilities without prior notice, is unconstitutional.
While the Union may seek to challenge this verdict in the Supreme Court, the Kerala High Court’s ruling currently stands as a strong constitutional safeguard against arbitrary taxation on mutual entities.
Appearances | For IMA : Senior Advocate Arvind P Datar, Advs George Varghese (Perumpallikuttiyil), Manu Srinath, Nimesh Thomas, Lijin Thampy
For Union : ARL Sundaresan, Addl Solicitor General
For State : Mohammed Rafique, Special Govt Pleader (Taxes)
Case : Indian Medical Association Kerala Branch vs Union of India
