The recent judgment of the Kerala High Court dated April 11, 2025, in the case of Indian Medical Association (IMA) Kerala State Branch vs. Union of India marks a watershed moment in the taxation of services provided by associations to their own members under the Goods and Services Tax (GST) regime. This decision not only struck down a key retrospective amendment, including Section 7(1)(aa) and section 2(17)(e), which had attempted to tax such services but also reaffirmed a fundamental legal principle—the doctrine of mutuality—that has governed similar taxation issues since the service tax era.
Background and Legal Controversy:
The controversy began when the Indian Medical Association, Kerala State Branch—a mutual benefit association providing various services and benefits to its member doctors—received demand notices from GST authorities. These notices relied on a retrospective amendment introduced by the Finance Act, 2021, specifically Section 7(1)(aa) of the Central GST Act (CGST Act), 2017, which redefined “supply” to cover services between associations/clubs and their members starting from July 1, 2017.
Prior to this amendment, services furnished by members club to their own members were not subject to taxes primarily due to the doctrine of mutuality, which legally regards the association and its members as a single entity. Consequently, transactions within were not “supplies” from one distinct person to another, an essential element for GST applicability under Article 366(12A) and the broader constitutional framework.
The Doctrine of Mutuality: A common Law principle recognized by judiciary.
The doctrine of mutuality is not a creation of statutory law but a common law principle developed through judicial interpretation. Indian courts have consistently recognized that an association comprising its members functions collectively, not as separate supplier and recipient. While no specific provision in tax law originally codified this concept, the judiciary has relied on common law to safeguard it, emphasizing that taxation must respect established principles of justice and fairness. The key facets of this principle include:
- Identity of Contributors and Beneficiaries: Members contribute funds and receive benefits mutually.
- No Profit Motive: Surpluses are utilized for association activities or returned to members.
- No Transfer to Third Parties: Transactions are internal and do not constitute commercial services.
Erstwhile Tax Regime: Precedents Protecting Mutuality
Before GST’s introduction, the service tax framework contained provisions specifically taxing “clubs and association services.” Yet, several judicial pronouncements consistently upheld the doctrine of mutuality, exempting member-based services from indirect tax liability:
- Young Men’s Indian Association case (SC) recognised mutuality in the context of Income Tax.
- Supreme Court ruling in State of West Bengal vs. Calcutta Club Ltd. 2019
(29) GSTL 545 (SC): The Court held that supplies made by a club or association to its own members are not taxable under the West Bengal Sales Tax Act and VAT law, as this violates the principle of mutuality. This ruling was later extended to service tax jurisprudence as well, strengthening the protection available to associations. - Ranchi Club Ltd. v. Chief Commissioner (Jharkhand HC, 2012) and Sports Club of Gujarat Ltd. v. Union of India (Gujarat HC, 2013):
These High Courts ruled that associations and their members are not separate taxable entities in their mutual transactions, protecting them from service tax liability. - CIT v. Bankipur Club Ltd. (SC, 1997):
It laid down the tripartite test for mutuality (identity of contributors and beneficiaries, no profit motive, no third-party dealings), which has decisively influenced tax jurisprudence.
CBEC circulars and clarifications introduced monetary thresholds for collections exempt from service tax (?5,000 per month per member), further providing operational relief.
Transition to GST and the Retrospective Amendment Controversy:
With the roll-out of GST in July 2017, the definition of “supply” codified in Section 7(1) of the CGST Act did not initially include transactions between clubs/associations and their members. In addition, the definition of ‘business’ under Section 2(17)(e) was expanded to specifically include the provision by a club, association, or society of facilities or benefits to its members. However, the Finance Act, 2021, through Section 7(1)(aa), retrospectively expanded “supply” to cover such transactions from the inception date of GST.
This retrospective amendment was met with opposition and litigation, arguing it violated the constitutional principles underlying GST and the entrenched mutuality doctrine.
Kerala High Court Judgment: Key Highlights
In a division bench ruling, the Kerala High Court declared Section 7(1)(aa) unconstitutional and ultra vires the Constitution on the following grounds:
- Doctrine of Mutuality Remains Supreme: The court affirmed that a member’s club cannot supply goods or services to itself or its members because they form a single economic unit, lacking the duality required to constitute a supply.
- Violation of Constitutional Framework: The Court ruled that taxing services between associations and their members retrospectively was unconstitutional. It clarified that this was not based on Article 366(12A), but on the principle of mutuality, since associations and their members are the same entity and no real supply exists. The Court also noted that such a change could only be made through a constitutional amendment, not just by changing the GST law.
- Impact on Associations Nationwide: This restores tax exemption on resident welfare associations (RWAs), trade unions, clubs, and other member-based associations, relieving them of retrospective GST demands.
- Legislative Competence and Remedies: The court emphasized that altering the scope of “supply” at this fundamental level needs constitutional amendment, not mere statutory modification.
Earlier Conflicting View Reversed:
This decision overturned an earlier single-judge ruling from July 2024, which had upheld the retrospective amendment applying GST to such transactions but limited its retrospective effect.
Implications for GST Law and Associations
- The judgment protects the interests of many associations and RWAs across India, offering hope to challenge retrospective tax demands.
- It highlights judicial checks against legislative overreach, especially on retrospective tax laws infringing constitutional boundaries.
- The ruling underscores the enduring relevance of established legal principles like mutuality, even amidst evolving indirect tax regimes.
- It could drive legislative refinements or even Supreme Court scrutiny on the matter, shaping GST jurisprudence for years.
Subsequent Notices by DGGI Post-Judgment:
Despite the Kerala HC striking down the amendment retrospectively, the Directorate General of GST Intelligence (DGGI) issued notices seeking compliance and GST recovery from IMA regarding supplies rendered. These notices have caused confusion and contention since they are issued based on provisions that have been quashed by the HC. The IMA and other associations have challenged these notices, relying on the HC ruling as a shield against tax demands and recovery actions.
Applicability of HC Judgment at National Level:
A High Court's decision is binding only within its territorial jurisdiction (Kerala in this case) unless upheld or stayed by the Supreme Court. However, the judgment is highly persuasive and influential in other jurisdictions and is often followed by tribunals and other HC benches. National-level applicability would require either Supreme Court affirmation or adoption of the reasoning by other judicial forums.
The Kusum Ingots Supreme Court judgment clarified that while a High Court’s jurisdiction is territorially limited to its state, if it strikes down a Central legislation as unconstitutional, that decision generally holds nationwide applicability unless stayed or overruled by the Supreme Court. This principle promotes uniformity of law across India and prevents contradictory rulings in different states. However, technically, this nationwide applicability is an obiter dictum and subject to debate. Despite this, many High Courts have followed it, and the Supreme Court has implicitly accepted it in practice for consistency in constitutional matters involving central laws.
Can the Department Initiate Proceedings Under a Struck Down Section?
Once a section or amendment is declared unconstitutional and struck down by a competent court, it ceases to have legal force from the date specified by the court (usually retrospective to the amendment date). Departmental proceedings based on such provision lack legal validity and can be challenged successfully. Continuing proceedings under a non-est (non-existent) law violates principles of natural justice and legal certainty. However, if higher courts stay the HC verdict or the matter is sub judice, authorities may proceed cautiously. The Hon’ble Supreme Court has emphasized that tax authorities cannot initiate proceedings on the same subject matter if already adjudicated or when the provision relied upon stands invalid.
Conclusion:
The Kerala High Court’s April 2025 ruling in Indian Medical Association vs. Union of India stands as a landmark victory for associations, clubs, and RWAs subjected to GST demands on member services. By reaffirming the doctrine of mutuality and striking down the retrospective amendment under Section 7(1)(aa) of the CGST Act, the court has restored a core legal safeguard against unwarranted taxation. This judgment bridges a long line of precedents protecting mutual associations from indirect taxes since the service tax regime, offering clarity and relief within the GST framework. Moving forward, the ruling emphasizes constitutional sanctity over retrospective tax impositions and calls for careful legislative action in the complex domain of indirect taxation. While the Government has already appealed the decision, no stay has been granted, and the case is pending before the Supreme Court vide SLP (C) Nos. 18349-18350/2025.