Doctrine Of Mutuality and GST: Indian Medical Association v. Union of India
Brief Facts:
The Indian Medical Association, Kerala State Branch (“IMA Kerala” or “Petitioner”) is a registered society and the State unit of the Indian Medical Association. The Petitioner operates multiple schemes exclusively for the benefit of its member-doctors, including social security schemes, disability support schemes, professional protection schemes, hospital protection schemes, health schemes, etc. Under these schemes, members contribute admission fees, annual subscriptions, and other scheme-specific contributions, which are pooled and utilised to provide financial assistance, legal support, health-related benefits, pensionary benefits, or aid in the event of death, disability, illness, or litigation. Each scheme is administered separately, has independent accounts, and is governed by its own bye-laws and managing committee.
The Petitioner had obtained GST registration and was subject to coercive action by the tax authorities, including recovery proceedings, pursuant to a summons issued by the Directorate General of GST Intelligence seeking details of its GST registration, audited accounts, and financial records for the period 2017-18 to 2021-22. The apprehended tax demand related to services allegedly rendered by the Petitioner to its members under the aforesaid schemes.
Under the GST regime as initially enacted, transactions between a club or association and its members were outside the scope of GST on the basis of the mutuality principle, as recognised by judicial precedent. This position was altered by the Finance Act, 2021, which retrospectively amended the CGST Act and the Kerala SGST Act with effect from 1 July 2017 by inserting Section 7(1) (aa) along with an Explanation and amending Section 2(17)(e). The amendments introduced deeming provisions treating activities or transactions between a club or association and its members, for consideration, as taxable supplies for the purposes of the levy of GST. After the introduction of these amendments and the initiation of proceedings, the constitutional validity of the amended provisions, and whether the amendments impermissibly sought to tax transactions that did not constitute “supply” under the Constitution with retrospective operation, were examined before the Kerala High Court.
A learned Single Judge of the Kerala High Court partly allowed the writ petition by striking down the retrospective operation of the amendments, while upholding their substantive validity. Aggrieved by the decision, both the Petitioner and the tax authorities filed writ appeals before the Division Bench.
Issues for Consideration:
- Whether the amendments introduced by the Finance Act, 2021, to Section 2(17)(e) and Section 7(1)(aa) of the CGST Act and KGST Act, deeming supplies by clubs or associations to their members as taxable supplies, are constitutionally valid?
- Whether, under the constitutional framework governing GST, the concept of “supply” permits taxation of transactions between a club or association and its members, notwithstanding the principle of mutuality?
- Whether the retrospective operation of the impugned amendments with effect from 1 July 2017 is constitutionally permissible?
Judgement:
The Division Bench of the Kerala High Court allowed the Petitioner’s writ appeals and dismissed the appeals filed by the tax authorities, holding that the impugned amendments were unconstitutional in their entirety. The Court held that GST, as envisaged under Article 246A read with Article 366(12A) of the Constitution, is a tax on the supply of goods or services or both, and that the concepts of “supply” and “service” inherently require the existence of two distinct persons, namely a supplier and a recipient. Transactions involving self-supply or self-service are not contemplated under the constitutional scheme. The Court noted that while the 46th Constitutional Amendment had introduced a deeming fiction under Article 366(29A) to treat certain transactions as “sales” for the purposes of sales tax, no corresponding constitutional amendment had been enacted in the context of GST to deem supplies between clubs and their members as taxable supplies.
The impugned amendments, according to the Court, merely sought to expand the statutory definition of “supply” without amending the constitutional definition of GST or the concept of “service”. In the absence of a constitutional deeming provision, Parliament could not, by way of a statutory amendment, enlarge the scope of “supply” to include transactions that constitutionally do not amount to a supply. The Court relied heavily on the doctrine of mutuality, as recognised and affirmed by the Supreme Court in State of West Bengal v. Calcutta Club Ltd., and held that the principle continued to apply even after the introduction of GST. Since the identity between the club and its members remained intact, there could be no taxable supply of services between them.
On this basis, the Court held that Section 2(17)(e) and Section 7(1) (aa) of the CGST Act and KGST Act, along with the Explanation thereto, failed the test of constitutional validity and were ultra vires Articles 246A, 366(12A), and 265 of the Constitution of India. In view of this conclusion, the Court did not find it necessary to separately sustain the amendments, even prospectively, and held them unconstitutional and arbitrary. The judgment of the Division Bench of the Kerala High Court has since been carried in appeal, and the issues arising from the decision are currently pending consideration before the Supreme Court of India.
Our Thoughts:
This ruling is a strong reaffirmation of the constitutional limits of the GST framework and the continued relevance of the principle of mutuality. By holding that GST can operate only where there is a supply between two distinct persons, the Court correctly rejected attempts to tax transactions that are, in substance, internal to an association and its members. The judgment emphasises that Parliament cannot use statutory deeming provisions to override constitutional concepts, and that any departure from the mutuality principle must be rooted in a constitutional amendment rather than ordinary legislation. From a practical standpoint, the decision provides certainty and relief to clubs, associations, and professional bodies such as the Indian Medical Association, while also signalling that foundational changes to the GST regime must respect constitutional boundaries.
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