Kerala HC upholds GST levy on association services under Section 7(1)(aa) but rules provision applies prospectively from 2022

The Kerala HC dismissed constitutional challenges to Section 7(1)(aa) of the Central GST Act, 2017, which levies GST on services provided by associations to members, overriding the doctrine of mutuality. The court held the amendment was within legislative competence and did not violate fundamental rights. However, the court ruled the provision should apply prospectively from 01.01.2022, not retrospectively from 01.07.2017, as the mutuality principle was well-established when GST was introduced. The assessing authority must examine each activity independently to determine if it involves supply of goods/services subject to GST.

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Issues Involved:
1. Constitutionality of Section 2(17)(e) and Section 7(1)(aa) of the CGST Act, 2017.
2. Retrospective application of Section 7(1)(aa) of the CGST Act, 2017.
3. Principle of mutuality and its applicability to the petitioner association.
4. Legislative competence to define "person" for taxation purposes.
5. Specific activities of the petitioner association and their taxability under GST.

Issue-wise Detailed Analysis:

1. Constitutionality of Section 2(17)(e) and Section 7(1)(aa) of the CGST Act, 2017:
The petitioner argued that Sections 2(17)(e) and 7(1)(aa) of the CGST Act, 2017, are ultra vires Article 246A read with Article 366(12A) and violate Articles 14, 19(1)(g), 265, and 300A of the Constitution of India. The court held that Article 246A empowers the Parliament and State Legislatures to enact laws with respect to GST, which includes the supply of goods and services. The court found that the Constitution does not restrict the Parliament from defining "person" for taxation purposes, and thus, the legislative amendments were within the competence of the Parliament and not ultra vires.

2. Retrospective application of Section 7(1)(aa) of the CGST Act, 2017:
The petitioner contended that the retrospective application of Section 7(1)(aa) from 01.07.2017 is unconstitutional and imposes an unforeseen burden. The court held that while the Parliament has the power to make laws retrospectively, the amendment in Section 7(1)(aa) should not have retrospective effect from 01.07.2017. Instead, it should be effective from the date it was notified, i.e., 01.01.2022. The court reasoned that the petitioner did not collect GST due to the settled position of law, and retrospective application would be unjust.

3. Principle of mutuality and its applicability to the petitioner association:
The petitioner argued that the principle of mutuality applies, meaning there is no supply of goods and services between the association and its members. The court acknowledged the principle of mutuality as established in the case of Calcutta Club (supra) but noted that the Parliament amended the GST Act to include Section 7(1)(aa), which deems a club/association and its members as separate persons for the purpose of GST. The court held that this amendment is within the legislative competence and does not violate any constitutional provisions.

4. Legislative competence to define "person" for taxation purposes:
The court referred to the judgments in Karnataka Bank Ltd v. State of Andhra Pradesh and State of Madhya Pradesh v. Rakesh Kohli, which upheld the legislature's power to define "person" for taxation purposes, even if it deviates from the General Clauses Act. The court concluded that the Parliament and State Legislatures have the authority to define "person" broadly to include clubs and associations for the purpose of GST.

5. Specific activities of the petitioner association and their taxability under GST:
The court noted that the petitioner association undertakes various activities, some of which involve the supply of goods and services to its members. The court directed the assessing authority to examine each activity independently to determine its taxability under GST. The petitioner was instructed to cooperate with the assessment proceedings, and the interim order was to remain in operation until the assessment was complete.

Conclusion:
The court dismissed the challenge to the constitutionality of Section 7(1)(aa) of the CGST Act, 2017, but held that the provision would have prospective operation from 01.01.2022. The matter was remanded back to the respondents for assessment, with the petitioner directed to file their responses to the impugned show-cause notices.

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