GST on Clubs/Societies and Their Members: Has Mutuality Lost Its Place?
Introduction
Clubs and societies—be it social, recreational, or sports-oriented—have long been structured around the principle of mutuality. Members pool resources for collective benefit, and the entity merely manages these funds to provide facilities or services. For decades, this relationship was considered non-commercial, insulating such transactions from tax. However, the advent of the Goods and Services Tax (GST) regime, particularly with the 2021 amendment to Section 7 of the CGST Act, has called this foundation into question. This article critically examines the GST implications on clubs and societies in light of recent legal and policy developments.
The Doctrine of Mutuality: Historical Perspective
The doctrine of mutuality,
originating from English law, suggests that one cannot trade with oneself. It
has been applied in both Indian income tax and sales tax regimes and has been
upheld by Indian courts.
In the context of clubs, the doctrine meant that transactions between a club and
its members were considered self-service and not subject to tax. The core idea
is that when individuals contribute to a common fund for their mutual benefit,
no income is generated. Thus, no surplus is earned from oneself.
The Supreme Court in State of West Bengal vs. Calcutta Club Ltd, (M/s) Ranchi Club Ltd. [2019(10)LCX0204] upheld this principle, ruling that the sale of goods or services by a club to its members does not attract sales tax or service tax. The judgment in Joint Commercial Tax Officer vs. Young Men’s Indian Association (1970) further solidified this view, stating that sales by an incorporated entity to its members are considered sales to oneself, and thus not taxable.
GST and the 2021 Amendment: A Shift in Perspective
Initially, the GST framework followed this judicial stance. However, to override the Calcutta Club ruling, the GST Council addressed the issue of GST on clubs and associations.
In the 39th Meeting of the GST Council, the issue of GST applicability to clubs and associations was discussed. The Council proposed an amendment to Section 7 of the CGST Act, which would explicitly include transactions between clubs and their members as taxable, regardless of whether the club was incorporated. This was seen as a way to counteract the impact of the Calcutta Club decision.
The decision was formalized with the amendment of the CGST Act via the Finance Act, 2021, which added a new clause (aa) along with an Explanation to Section 7(1).It states:
"(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;"
This clause clarified that activities or transactions between a person and its members, for cash, deferred payment, or valuable consideration, would be treated as a taxable supply. The amendment, effective from July 1, 2017, effectively disregarded the principle of mutuality and treated the club and its members as distinct entities for the purposes of GST.
The Constitutional Challenge: The Indian Medical Association Case
The new provisions were challenged by several clubs and associations, with the Indian Medical Association [2025(04)LCX0049]being a notable case. The Kerala High Court addressed the constitutionality of the amendments to the GST law, specifically the insertion of Section 7(1)(aa) and related provisions. The Court struck down Section 7(1)(aa), Section 2(17)(e), and the Explanation thereto of the CGST and KGST Acts, holding them unconstitutional and void as they are ultra vires Articles 246A, 366(12A), and 265 of the Constitution of India. This ruling came in response to challenges raised by the Indian Medical Association and others against the GST levy on transactions between clubs/associations and their members.
1. Core Constitutional Issue: Can One Transact with Oneself?
The case centered on the principle of mutuality, under which a club and its members are treated as the same person. The Court agreed with the petitioners that a valid supply under GST requires two distinct parties. Referring to the Calcutta Club Ltd. and Ranchi Club decisions, it held that payments by members to their own club do not amount to taxable transactions. The 2021 amendment, which artificially treats clubs and members as separate persons, was found to contradict this constitutional position.
2. Legislative Competence and Constitutional Limits
3. Failure to Amend the Definition of "Service"
The Court noted a key flaw: the amendment deemed club-to-member dealings as "supply" but didn’t amend the definition of "service." Since GST on services requires two distinct parties, the omission undermines the amendment, especially in light of Supreme Court rulings affirming that self-service isn’t taxable.
4. The Retrospective Angle: Fairness and Rule of Law
Another key aspect of the Court’s reasoning was its strong rejection of retrospective taxation. The amendment introduced in 2021 was given retrospective effect from 1 July 2017, effectively creating tax liability for past periods where clubs and associations had no way of anticipating or collecting GST. The Court found this to be a violation of Article 265 of the Constitution, which requires that tax must be levied by authority of law. It further held that retrospective taxation, in the absence of clarity and legal certainty, violated the principle of fairness and the Rule of Law, both considered part of the basic structure of the Constitution.
The Court concluded that:
Sections 2(17)(e) and 7(1)(aa) of the CGST and KGST Acts, along with their Explanation, are unconstitutional.
The doctrine of mutuality continues to prevail under the Constitution, and clubs and their members cannot be treated as separate taxable persons for GST.
The retrospective application of the amendment from 2017 was unfair and illegal, as clubs had no opportunity to comply or pass on the burden.
Accordingly, the Court allowed the appeal of the Indian Medical Association, and declared the impugned provisions as void and unenforceable.
This judgment significantly impacts the way GST is applied to clubs and associations, reaffirming the doctrine of mutuality and ensuring that clubs and their members are not subjected to GST on transactions that do not involve third-party commercial interests.
Conclusion
The Kerala High Court’s judgment has provided a significant reprieve for clubs and their members by upholding the doctrine of mutuality and striking down the retrospective amendments made to the CGST and KGST Acts in 2021. The Court’s ruling makes it clear that transactions between a club and its members, such as membership fees or contributions for services, are not taxable under GST, as the club and its members are considered the same entity under the principle of mutuality.
However, while this judgment is a relief, clubs must remain cautious. The tax authorities may take action in light of this ruling, including issuing notices for past non-compliance or attempting to challenge the decision. The government might also choose to amend the law further, possibly appealing the ruling or introducing new provisions to counter the Court’s decision. Clubs and associations should monitor developments closely and seek legal advice to ensure compliance and mitigate any risks arising from potential future actions by the department.
Disclaimer: The information given in this article is solely for purpose of understanding the law. It is completely based on the interpretation of the author and cannot be constituted as a legal advise, the author of this article and Lawcrux team is not responsible for any legal issues if arises on the basis of the interpretation given above.