GST

Retrospective amendment in GST laws – Is it Fair?

During the disruptions caused by the pandemic, the Hon’ble Finance Minister, in Budget 2021-22, hailed as a ‘development-oriented’ and ‘visionary’ budget, announced multiple changes to the Goods and Services Tax (GST) framework, among other things.

The amendments had been proposed in the Finance Bill 2021, which amends the Central Goods and Services Tax Act, 2017 (the CGST Act) and the Integrated Goods and Services Tax Act, 2017 (the IGST Act) to combat frauds related to the input tax credit, protect federal revenues, and provide statutory backing to debated Rules.

This GST blog delves into recent changes in GST Laws, as enacted by Clauses 99 and 113 of Finance Bill, 2021^[1], on the question of whether GST is imposed on services provided by a Club or Association to its members.

Retrospective amendment in Finance Bill, 2021

In the Finance Bill, 2021, the Central Government proposed amending the definition of ‘supply’ – which is the taxable event under the Goods and Services Tax (GST) laws – that too retrospectively (which has now been enacted as an Act). The activities, events, and transactions by a person other than an individual to its member or constituents, or vice versa, for cash, payment deferrals, or other valuable consideration, have been retrospectively brought under the definition of supply, according to the amendment. Such activities, therefore, become taxable under GST with retrospective effect.

As a result of this amendment, the provision of goods or services by clubs or associations to their members for cash, deferred payment, or other valuable consideration will be treated as a supply and will be taxable under GST laws. While this amendment is unsettling in and of itself, given the long line of judicial precedents existing on the doctrine of mutuality, it is made all the more so by the fact that it is retroactive with effect from July 1, 2017.

Breaking down the provisions added

To get away with the principle of mutuality, the government has broadened the definition of “supply” to include supplies between the clubs/ associations and their members and to tax them accordingly.

In Section 7(1) of the CGST Act 2017, a retrospective amendment has been proposed by inserting a new clause ‘(aa)’ after clause (a) to broaden the scope of the term ‘supply’ by incorporating activities, events, or transactions of supply of products or services or both between any person (other than an individual) to its members or constituents or vice versa in exchange for cash, payment deferrals, or any other valuable consideration.

Furthermore, an explanation is also inserted to state that the person and its members or constituents shall be deemed to be two distinct & separate persons and that the said explanation has precedence over anything contained in any other law currently in force, even including judgments of any Court, Tribunal, or other authority whatsoever.

As a result, Paragraph 7 of Schedule II to the CGST Act, 2017 has been proposed to be deleted retrospectively (with effect from July 1, 2017), which is related to the ‘supply of goods by unincorporated associations or bodies of persons to a member thereof for cash, payment deferrals, or other valuable consideration’ as an activity/ transaction being treated as supply of goods.

The taxability of transactions between clubs and their members

It is necessary to go back to Service tax regime and examine the taxability of transactions between clubs or associations and their members and constituents in order to fully comprehend the doctrine of mutuality.

There has always been debate about the taxability of transactions between clubs, associations, and other organizations and their members. In this regard, the Hon’ble Supreme Court held in the State of West Bengal & Ors. v. Calcutta Club Limited [2019 (29) G.S.T.L. 545 (S.C.)] for the erstwhile Service tax regime that there can be no sale of goods or provision of services between incorporated private clubs, associations, etc. and their members due to the principle of mutuality. The principle of mutuality is such that it treats such clubs/ associations and their members as one person.

It should be noted here that, while Explanation 3 to Section 65B (44) of the Finance Act of 1994 established a deeming fiction to consider the activities between an unincorporated association and its members as deemed supply.

The same question was raised many times under the GST regime, with several competing viewpoints until the Maharashtra Appellate Authority for Advance Ruling (AAAR) in the Rotary Club of Mumbai Queens Necklace case [TS-1299-AAAR-2019-NT] decided that the amount collected as membership subscription and admission fees from members is not liable for GST because they do not amount to a supply of services.

However, the reasoning of the Maharashtra Appellate Authority for Advance Ruling (AAAR) was based more on the scope of the GST Act’s definition of “supply” than on the doctrine of mutuality. According to the Maharashtra AAAR, the money collected from members of such clubs or organizations was used to pay for various administrative expenses rather than for any business activity. As a result, collecting fees and subscriptions for meeting expenses falls squarely outside purview of supply as defined under Section 7 of the GST Act, 2017.

But now, the amendment appears to be doing away with the principle of mutuality and has disrupted the settled jurisprudence (along with specific overriding effect over any other judgments) with a retrospective date to ensure that there is a levy of GST on goods and services supplied by clubs or associations to their members, regardless of whether the entity is incorporated or not.

Even though the aforementioned amendment is made retrospectively applicable, the validity of such a retrospective amendment may still be debated by experts and subject to litigation.

Impact on clubs and associations

Clubs/ associations, as a matter of fact, have not been exempted from GST liability since July 1, 2017. It is indeed surprising that retrospective amendment has been proposed nearly 4 years after the implementation of GST, despite being aware of the implications that it shall bring for the clubs/ associations.

The first and most important step will be to trace the transactions with the members, assign a value, and then deposit GST and applicable interest with the Government. The members will almost certainly not bear the burden of the GST, and the clubs/ associations will suffer as a result. Aside from the commercial challenges that this amendment raises, it also strikes at the heart of the doctrine of “separation of powers” which is a constitutionally mandated pillar.

Conclusion

The chances are that this amendment will be challenged sooner or later, and it can be believed that, before getting into the merits of the issue, the challenge will be made to the proposed retrospective effect of this artificial definition. However, until such a decision is made, clubs and associations should expect notices to discharge their GST liability beginning from July 1, 2017.

Read our article:GST Council to issue a clarification on Gaming Industry, Casinos, and Racecourses