Provisions under GST deeming transactions between Association and its members as supply held unconstitutional by Divisional bench of Kerala HC

This Tax Alert summarizes a recent ruling of the Kerala High Court (HC)^[1]  on levy of Goods and Services Tax (GST) on fee collected by Association from its members and the constitutional validity of the provisions of Section 2(17)(e) and Section 7(1)(aa) of the Central Goods and Services Tax Act, 2017 (CGST Act).

The key observations of the HC are:

• The GST framework requires presence of at least two parties, a provider and a recipient, for the concepts of "supply" and "service" to be applicable.
• Article 246A of the Constitution, which grants legislative powers to the Union and States to make laws regarding goods and services tax, uses the term "supply" without an artificial extension to include "deemed supply”.
• The impugned amendment in Section 7(1) of the CGST Act redefine "supply" to include transactions between entities and their members for consideration but does not classify them as "services". Thus, the definition of "service" remains unchanged and there is no deemed "service" for clubs or associations providing services to its members.
• The concept of "supply" and "service" under the Constitution and CGST Act excluded transactions based on principle of mutuality. The amendment carried out by the legislature is unconstitutional since it incorporates a definition of supply that militates against the constitutional understanding of the terms.
• The Supreme Court ruling in case of Calcutta Club Ltd ^[2] affirms that the principle of mutuality remains intact even after the 46th Constitutional Amendment. As long as this judgment is a binding precedent and the Constitution is not amended to remove mutuality from the definitions of supply and service, the challenged amendment to the CGST Act will be unconstitutional.

Accordingly, the HC held that the provisions of Sections 2(17)(e) and 7(1)(aa) of the CGST Act are unconstitutional and ultra vires the provisions of Articles 246A, 366(12A), and 265 of the Constitution.

Comments:

• The ruling is likely to provide relief to all member-based organizations, including co-operative and credit societies, associations, industry chambers and trade bodies, where members mutually contribute towards various facilities and benefits received by them. However, the Revenue may litigate the judgement before the SC.
• Madras HC has also admitted a writ petition challenging the constitutional validity of the amendments made in Section 7(1)(aa) of the CGST Act through Finance Act, 2021 [W.P.No.4863 of 2022].
• Last year, Karnataka HC ruled on the doctrine of mutuality under service tax, stating that there can be no service between a trust and its contributors, as they cannot be treated as separate entities [TS-52-HC-2024(KAR)].
• Implication of the HC ruling under GST regime, laying emphasis on concept of mutuality and existence of two parties in a transaction involving supply of service, will need to be evaluated for activities between distinct persons which are treated as deemed supply in terms of Schedule I to the CGST Act. 

^[1] 2025-VIL-338-KER
^[2] 2019 (29) GSTL 545 (SC)