APRIL16, 2025

No GST on services by Clubs and Associations to Members?

By Vijay Kumar

EVER wonder whether the hefty maintenance charge you pay to your Residents Welfare Association is liable to GST?

In TIOL-DDT 343 - 18 04 2006, nineteen years ago, I wrote,

FICCI, CII, ASSOCHAM and several trade associations liable to Service Tax as club or association?

Yes! According to the Hyderabad Chief Commissioner. He clarified this in a recent RAC meeting. FAPCCI - Federation of Andhra Pradesh Chambers of Commerce and Industry - the apex body for traders and industries in Andhra Pradesh is a Service Tax assessee in Hyderabad. FAPCCI guides and advises the industry and trade but FAPCCI itself was in doubt whether they were liable to pay Service Tax and they asked this question in the RAC meeting. The Chief Commissioner clarified that FAPCCI was liable to pay service tax under sub-clause (zzzc) of Section 65(105) of the Act.

It was also clarified that the service tax is payable on the subscription fee paid by the members of the association whether or not they have availed the services of the association.

Service Tax has become GST, but the taxing issue remains. The question is whether a club or association is liable to pay GST on the charges collected from its own members? Is it not self-service? Doesn't service by definition require at least two parties, a service provider and a service receiver?

In Ranchi Club vs Chief Commissioner of C. Ex & Service Tax, the Jharkhand High Court held 2012-TIOL-1031-HC-JHARKHAND-ST

Sale entails transfer of property whereas in service, there is no transfer of property. However, the basic feature, common in both transactions, requires existence of the two parties; in the matter of sale, the seller and buyer, and in the matter of service, service provider and service receiver.

It can be held that in view of the mutuality and in view of the activities of the club, if club provides any service to its members may be in any form, then it is not a service by one to another as foundational facts of existence of two legal entities in such transaction is missing.

This was upheld by the Larger Bench of the Supreme Court in Chief Commissioner of Central Excise and Service Tax vs Ranchi Club Ltd and State of West Bengal vs Calcutta Club Ltd - 2019-TIOL-449-SC-ST-LB.

This issue was discussed in the 39th GST Council Meeting held on 14th March 2020.

The agenda mentioned:

The Hon'ble Supreme Court of India laid down the following ratio:

From 2005 onwards, the Finance Act of 1994 does not purport to levy Service Tax on member clubs in the incorporated form. (Para 84)

The doctrine of mutuality continues to be applicable and that there cannot be a sale transaction between a club and its members. Clubs or associations in law have no separate existence from that of the members. (para 49)

The judgment covers two aspects:

a) leviability of sales tax on supply of food and drinks by a member club to its members; and

b) leviability of service tax on the services provided by a member club to its members.

The Government told the Council,

Judgment of the Supreme Court in Calcutta Club case, clearly shows that in order to tax any supply by an Association-of-persons (AoP) to its members, the doctrine of mutuality needs to be overcome by express provisions to that effect in the taxing statute.

The Council was informed:

GST on supplies of goods or services by an unincorporated or incorporated entity to its members may become subject matter of litigation. There is no provision in the CGST Act, 2017 which stipulates that an unincorporated or incorporated entity and its members shall be distinct persons. In the absence of a provision to this effect, the subject judgment of the Hon'ble Supreme Court becomes squarely applicable. The doctrine of mutuality applies and thus supplies by unincorporated or incorporated entity to its members is a supply to self and not leviable to GST.

The Council was further informed:

Therefore, it is imperative to amend the CGST Act, 2017 so as to safeguard the levy of GST on supplies by an association or body of persons (whether incorporated or not) to its members.

The Council approved and promptly the Government started the legislative process. The Finance Act 2021 inserted a new clause to bring in the proposed changes with retrospective effect from 01.07.2017.

Section 7(1) of the CGST Act states:

(1) For the purposes of this Act, the expression - "supply" includes-

(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;

Now, a new clause "aa" has been added which reads as:

(aa) the 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.

Explanation.- For the purposes of this clause, it is hereby clarified that, notwithstanding anything contained in any other law for the time being in force or any judgment, decree or order of any Court, tribunal or authority, the person and its members or constituents shall be deemed to be two separate persons and the supply of activities or transactions inter se shall be deemed to take place from one such person to another;

So, the law as it stands today is that services by Clubs/Associations to their members are taxable - and right from 2017.

But is it?

The Kerala State Branch of the Indian Medical Association filed a writ petition in the Kerala High Court pleading that:

the provisions of Section 7(1) (aa) and the Explanation thereto, of the Central Goods and Services Tax Act, 2017 are unconstitutional and void being ultra vires the provisions of Article 246A read with Article 366(12A), and violative of Articles 14, 19(1)(g), 265 and 300A, of the Constitution of India;

The High Court had no doubt that the legislature has the power to enact validating laws that remove the basis of invalidity pointed out by the courts.

But the question here was slightly different;

Can the legislature levy tax on a transaction when the taxable event in relation to the subject of taxation has not been recognised as such by the Constitution?

When the Constitution has understood a taxable transaction as necessarily involving two persons, can a legislature deem a transaction that does not involve two persons as a taxable transaction?

The Counsel for the petitioner submitted that:

1. On account of the principle of mutuality the mere fact that statutory amendments have been made to the concept of "supply" under the GST Acts will not suffice to make their activities liable to the levy of GST;

2. The concept of service under the GST law itself contemplates the existence of two entities - a service provider and a service recipient and excludes the concept of self service for the purposes of the levy.

3. GST is envisaged as a levy of tax on the "supply" of "goods or services or both".

4. The words "goods", "supply" and "services" are understood in a particular sense under the Constitution. When the words used in the Constitutional text have acquired a meaning through judicial interpretation over the years, one must assume that that is the same sense in which the word is used when inserted into the Constitution through a later amendment.

5. While "goods" is a standalone concept, meaning thereby that it is not something that requires a plurality of persons to infer its existence, the concepts of "supply" and "service" do require a plurality of persons to infer their existence. This aspect was recognised in Ranchi Club - where it was laid down that the basic feature common in sale and services was that both required the existence of two parties.

6. The decision in Ranchi Club was quoted with approval by the Supreme Court in Calcutta Club.

7. Scheme of GST under the Constitution also contemplates the existence of at least two persons - a provider and a recipient before one can infer either a "supply" or a "service" for the purposes of the levy.

The High Court [2025-TIOL-598-HC-KERALA-GST] observed,

1. What we are confronted with in these proceedings is a situation where the statutory exercise undertaken by the legislative body has given a meaning to a word/concept therein that differs from the accepted meaning of the same word/concept under the Constitution.

2. When a word/concept in the Constitution has been interpreted by the Supreme Court in a particular manner, a legislative body, that derives its legislative competence to enact a Statute from the Constitution, cannot give to the word/concept a meaning that goes against the meaning assigned to the same word/concept by the Supreme Court in the context of its setting under the Constitution.

3. This is especially so because, when used in the Constitution in a particular sense, it is that sense of the word/concept that determines the very competence of the legislature to enact a law in relation to the subject represented by that word/concept.

4. That the Constitution has not been amended to deem a supply of service by a club or association to its members as a taxable service for the purposes of GST.

5. That a phrase as understood under the Constitution cannot be statutorily expanded by any legislature since the power to legislate is itself one that is conferred by the Constitution.

6. When similar situations arose in the past where various State legislatures attempted to broaden the tax net by statutorily expanding the definition of "sale", the Supreme Court struck down such amendments as being beyond the meaning of the word 'sale', the Constitution had to be amended.

The High Court declared the provisions of Section 7(1)(aa) and the Explanation thereto of the CGST Act, 2017 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.

What now?

Is there no GST on maintenance charges collected by Residents Welfare Associations and services provided by clubs and associations to their members?

Wait - don't rush to celebrate - there is still the Supreme Court and a possible amendment to the constitution - with retrospective effect of course.

But we need at least two persons - the provider and the recipient. Elementary?

The urge to tax remains eternal. And yet, despite the persistence, the mutuality principle remains, whispering to future legislators, E pur si muove-good luck trying again!