One Entity, One Soul: Unravelling the GST Puzzle around Clubs and Associations
Ashwarya Sharma, Advocate, Co-Founder & Legal Head, RB LawCorp
The insertion of Section 7(1)(aa) in the Central Goods and Services Tax (CGST) Act, 2017, marked a turning point in the GST regime, particularly concerning the taxation of services rendered by clubs and associations to their members. This article explores the constitutional implications of this statutory provision, critically examining its compatibility with the doctrine of mutuality and the meaning of "supply" under the constitutional framework. Through the lens of judicial interpretation and constitutional principles, the article evaluates the recent ruling by the Kerala High Court in Indian Medical Association Versus Union Of India (2025-VIL-338-KER) declaring the provision as unconstitutional.
I. Introduction
The introduction of the Goods and Services Tax (GST) was a transformative event in India's tax structure, aiming to create a seamless, unified tax system across the country. Anchored in Article 246A of the Constitution, GST empowers both the Parliament and the State Legislatures to make laws simultaneously for levying tax on the supply of goods and services. However, the constitutional legitimacy of what constitutes a "supply" and who constitutes a "person" under GST remains a crucial issue, especially in the context of clubs and associations rendering services to their members.
The Finance Act, 2021 introduced Section 7(1)(aa) into the CGST Act, with retrospective effect from 1st July 2017. This amendment created a deeming fiction whereby activities between a club or association and its members were deemed to be treated as taxable supplies between distinct persons. This provision raised significant constitutional concerns, particularly when viewed against the well-established doctrine of mutuality and without changing the definition of the said terms under the Constitution.
II. Issue before the Court
The core constitutional issue raised before the Court was whether the legislature can, by statute, create a taxable event that the Constitution does not recognize. Specifically, when the concept of "supply" under Articles 246A and 366(12A) presumes a transaction between two distinct persons, can the legislature deem a transaction lacking such duality-such as one between a club and its members-as a "supply"?
This question goes beyond statutory interpretation and strikes at the limits of legislative competence. The doctrine of mutuality, as recognized in constitutional jurisprudence, holds that a club and its members are not separate legal entities. Therefore, any legislative fiction that treats such a transaction as taxable runs contrary to the constitutional framework.
III. The Doctrine of Mutuality: Concept and Relevance
The doctrine of mutuality is based on a simple yet profound legal proposition: no one can transact with oneself. Under this doctrine, an organization and its members are regarded as one and the same, especially in contexts where the organization acts in the interest of its members and not for profit. The Black's Law Dictionary (10th Edition) defines the doctrine as follow:
Mutuality Doctrine: "The principle that a person cannot make a profit from himself; hence, when persons contribute to a common fund for a mutual benefit and not for commercial purposes, and the surplus is redistributed among them, no taxable profit arises because the contributors and beneficiaries are the same."
This concept is foundational in determining whether a transaction qualifies as a "supply" or "service." When a club provides facilities or services to its members, mutuality dictates that such services are not rendered to another person, but rather by the members to themselves through a common platform. Thus, club or association is nothing but a name given to all the members considered together. This absence of a transactional duality forms the bedrock of the doctrine.
Both in foreign and Indian jurisprudence, the doctrine of mutuality has consistently been upheld as a well-settled legal principle in both income tax and sales tax contexts. The origins of this doctrine trace back to English common law, beginning with the landmark ruling in Graff v. Evans [(1882) 8 QBD 373], where it was held that a sale between a club and its members is not a sale in the legal sense. This foundational idea was carried forward in Trebanog Working Men's Club and Institute Ltd. v. Macdonald [(1940) 1 All ER 454], where the principle was applied even to incorporated associations. Further, in Inland Revenue Commissioners v. Westleigh Estates Co. Ltd. [1924 (1) KB 390], it was clarified that a members' club, although incorporated, did not carry on trade or business for profit, and thus mutuality applied for tax purposes.
In India, the doctrine received judicial endorsement in Secretary, Madras Gymkhana Club Employees' Union v. The Management of Gymkhana Club [1967 SCC OnLine SC 51], where the Supreme Court recognized that a club was synonymous with its members, functioning as a self-serving institution. This understanding was reinforced in Cricket Club of India Ltd. v. Bombay Labour Union [AIR 1969 SC 276], wherein the Court unequivocally stated that incorporation under company law does not alter the fundamental identity between the club and its members.
The doctrine was further solidified in JCTO v. Young Men's Indian Association [1970-VIL-04-SC], where the levy of sales tax on the supply of food and beverages by a club to its members was struck down, as it did not constitute a "sale" under law.
The apex reaffirmation came in State of West Bengal & Ors. v. Calcutta Club Ltd. [2019-VIL-34-SC-ST], where the Supreme Court held that the principle of mutuality continued to apply even after the 46th Constitutional Amendment (1981). While the 46th Amendment sought to expand the definition of "tax on sale or purchase of goods" to include supplies made by unincorporated associations to their members, the Court emphasized that mutuality was not displaced by this change. Significantly, the decision also clarified that mutuality extends equally to incorporated and unincorporated clubs-a nuance that was overlooked in the 61st Law Commission Report, which formed the basis for the 46th Amendment.
It is particularly relevant in the context of GST, where the taxable event "supply" presupposes the existence of two distinct persons: a supplier and a recipient. Therefore, under mutuality, a transaction within a single entity comprising both the service provider and the recipient cannot be classified as a taxable supply.
IV. Constitutional Framework: Articles 246A and 366(12A)
The constitutional validity of Section 7(1)(aa) was tested against the provisions of Article 246A and Article 366(12A) of the Constitution. Article 246A introduces a special legislative power allowing both Parliament and State Legislatures to make simultaneous laws concerning GST on the supply of goods and services. Article 366(12A) defines GST as any tax on the supply of goods or services or both.
Crucially, the Constitution does not define "supply" in a way that would include transactions within a single legal entity. Nor does it provide any deeming fiction that alters the legal identity of persons involved in a transaction. Hence, the interpretation of "supply" must be consistent with its accepted legal meaning at the time of the constitutional amendment. Any statutory provision that purports to redefine or artificially extend this term by amending the subordinate laws without correspondingly amending the under lying provision in the "Constitution" risks exceeding the boundaries of constitutional delegation.
The Kerala High Court rightly observed that when constitutional phrases like "supply" and "service" have already been interpreted by courts to involve at least two distinct persons, a statutory provision cannot override this understanding by creating a deeming fiction without amendment in the "Constitution". Such an approach undermines constitutional sanctity and would be ultra-vires the Constitution.
V. Statutory Fiction vs. Constitutional Interpretation
Section 7(1)(aa) introduced a deeming provision that artificially treats a club or association and its members as separate persons. While legislative bodies are empowered to define and clarify terms in statutes, they cannot contradict the settled legal interpretation of constitutional terms as interpreted by the authoritative pronouncements made by the Constitutional Courts. The doctrine of mutuality, as applied in the context of tax law, creates an exception to the general rule of duality in transactions.
By deeming a self-service situation to be a taxable supply, the legislature attempted to override not just statutory law but constitutional interpretation. This raised a fundamental issue: can a legislature, through statutory amendment, expand the scope of a taxing provision beyond the boundaries delineated by the Constitution?
The answer, as elaborated by the Kerala High Court, lies in constitutional doctrine. Legislative competence derived from the Constitution. Therefore, any statutory provision that conflicts with the constitutional meaning of a term such as "supply" must be invalidated as ultra vires.
VI. Constitutional Understanding of 'Supply' and 'Service'
The Court also observed that on analysis of the scheme GST, it becomes evident that GST is envisaged as a tax on the "supply" of "goods or services or both." The terms "goods," "supply," and "services" are to be understood in the context of their constitutional meaning. Where words used in constitutional texts have acquired specific meanings through years of judicial interpretation, it must be presumed that the same meaning attaches to them when they are subsequently introduced into the Constitution by way of amendment. Notably, while the term "goods" is a standalone concept, which can exist independently without involving multiple parties, the notions of "supply" and "service" inherently require the presence of a plurality of persons. This principle was explicitly acknowledged in Ranchi Club v. Chief Commissioner of Central Excise & Service Tax [2012-VIL-126-JHR-ST], where the Supreme Court observed that both sale and service fundamentally require the existence of two parties. The ratio in Ranchi Club was later reaffirmed in Calcutta Club Ltd. v. Commissioner of Service Tax. It can therefore be safely concluded that the constitutional scheme of GST contemplates the presence of at least two distinct persons, namely, a supplier and a recipient, before a transaction can be considered a "supply" or a "service" for the purpose of taxation. In other words, the concepts of self-supply or self-service are not envisaged under the Constitution for the purposes of GST levy.
VII. Retrospectivity and the Rule of Law
Section 7(1)(aa) was enacted with retrospective effect from the very inception of the GST regime, i.e., 1st July 2017. Retrospective taxation, although legally permissible, is constitutionally constrained by the principles of fairness, reasonableness, and the rule of law.
The retrospective application of a tax provision that introduces a new liability, especially when it reverses a well-settled legal position, is inherently unjust. Clubs and associations that operated under the assumption of mutuality would not have charged GST to their members. Imposing liability on them retrospectively deprives them of the opportunity to recover tax and disrupts legitimate expectations.
The rule of law, a basic feature of the Constitution, demands predictability and transparency in governance. A retrospective tax that fundamentally alters the legal framework without fair warning is antithetical to this principle. The Kerala High Court rightly held that such retrospective application was constitutionally unsustainable.
VIII. A Food for Thought
Section 7(1)(c) of the CGST Act introduces a deeming fiction whereby "the activities specified in Schedule I, made or agreed to be made without a consideration" are deemed to be supplies. Clause 2 of Schedule I further elaborates that the supply of goods or services between related persons or between distinct persons, as defined under Section 25, when made in the course or furtherance of business, shall be treated as a supply even if made without consideration. Section 25(4) and (5) deem different establishments of the same legal entity, operating under the same PAN but registered separately under GST-whether within or across State-as "distinct persons."
In essence, this statutory fiction results in a situation where branch transfers within the same organization are treated as taxable supplies. However, this raises a critical constitutional question: can such intra-entity transfers, which lack the fundamental elements of a "supply" or a "sale" under the Constitution, particularly the presence of at least two separate persons and consideration, be validly taxed merely by statutory deeming' Thus, one could argue that taxing branch transfers based solely on a deeming fiction under a subordinate statute, in the absence of such recognition under the Constitution, may be ultra vires. While the GST framework introduces its own legal reality through deeming provisions, the validity of taxing a transaction that is, in substance, not a supply under constitutional principles remains open to challenge. In the author's view, in light of the present ruling, this potential constitutional challenge cannot be entirely ruled out.
IX. Conclusion: Future Implications and the Path Ahead
The Kerala High Court's ruling strikes at the heart of the ongoing friction between subordinate legislation and constitutional mandate. By declaring Section 7(1)(aa) unconstitutional, the Court has reasserted the centrality of the doctrine of mutuality and reaffirmed that taxing powers must operate within the interpretative bounds of the Constitution.
For clubs and associations across India, this judgment provides much-needed clarity and relief. It preserves the traditional understanding that mutual services within a single legal body do not constitute a taxable transaction. It also serves as a reminder to the legislature that while it may enact clarificatory or remedial provisions, such amendments cannot override constitutional doctrines or well-settled judicial interpretations.
Looking forward, any attempt to bring mutual transactions within the ambit of GST must be backed by a constitutional amendment that explicitly redefines the scope of "supply" and "person" "service". Until then, the principle that a man cannot trade with himself remains legally unassailable.
The future of taxability for clubs and associations will therefore hinge not on statutory innovation, but on constitutional evolution. Courts, lawmakers, and tax authorities must tread carefully in this domain, balancing the revenue interests of the state with the foundational values of fairness, predictability, and the rule of law.
[Date: 02/05/2025]
(The author is a practicing advocate, Co-Founder and Legal Head of RB LawCorp. He specializes in GST law. Suggestions or queries can be directed to ashsharma@rblawcorp.in. The views expressed in this article are strictly personal.)