Introduction

The issue of goods and services tax (GST) leviable on the services provided by the association to its member was recently challenged by the Kerala High Court Advocates’s Association (KHCAA) before the Kerala High Court. It was argued that such services to association members were not liable to tax under the Kerala State Goods and Services Tax Act, 2017 (KSGST) and the Central Goods and Services Act, 2017 (CGST). This too seems to be the position provided by, the Finance Bill 2021 that amended the CGST and the Integrated Goods and Services Tax Act, 2017 (ICGST) and which aimed to curb credit fraud and safeguard government revenue. In this article, the author has explained the recent amendment in GST laws made vide Clause No. 99 and 113 of the Finance Bill, 2021 (Bill) and explained whether GST can be levied on the services provided by the association to its members and if the doctrine of mutuality will be applicable to charitable activates?

Proposed Amendment under the Finance Bill 2021

Clause 99 of the Bill seeks to amend section 7 (1) of the CGST with retrospective effect from July 1, 2017, by inserting a new sub-clause (aa). The amendment seeks to ensure levy of tax on activities or transaction involving supply of goods and services by any person, other than an individual, to its member or constitutes or vice versa, for cash, deferred payment or other valuable consideration.

The explanation provides as below:

A person and its members or constitutes shall be considered to be a different person and the supply of activities or transaction inter se shall be considered to take place from one person to another and the overriding effect would be given to the said explanation over everything contained in any laws for the time being in force and even in the judgment of any court, tribunal or any other authorities.

Moreover, clause 113 of the Bill proposed to remove paragraph No. 7 of schedule 2 of the CGST with retrospective effect from July 7, 2017. This paragraph defines the supply of goods by unincorporated associations or body of persons to a member thereof, cash deferred payment or other valuable consideration ‘being activities treated as a supply of goods’.

Will Doctrine of Mutuality be Applicable in Charitable Activities?

Charity and mutuality are very old concepts. The former is performed as an act of benevolence and the latter is an arrangement to attain a common purpose.

1. Definition of Charitable Organization

Charitable organizations are not exempt from the GST. Section 9(1) of the CGST, 2017 and section 5(1) of IGST, 2017 deal with the charges of tax on the supply of goods and services or both, and it mandates that tax shall be paid by the taxable person. The term ‘person’ has been provided under section 2(84) of the CGST, 2017 to include both trusts as well as every artificial juridical person. Further, the word ‘taxable person’ has been defined in section 2(107) of the CGST to be a person who is liable to be registered under section 22 or section 24 of the said CGST. Therefore, a charitable organization has been considered as a ‘person’ under CGST. In addition, they may also be regarded as a ‘taxable person’ if they are registered or liable to be registered either because their aggregate turnover exceeds the threshold limit or they are a taxable person under section 24 CGST.

2. Doctrine of Mutuality

The doctrine of mutuality is based on a common law principle which is based on the concept that a person cannot make a profit from himself. An amount received from himself cannot be considered as an income and taxable. In other words, an identity between two is established in such a manner that the same cannot be regarded as a separate person to entail any sale of products or providing of service on their own. Further, in the case of “Yum Restaurant (Marketing) Pvt. Ltd v. CIT, the court held that the concept of mutuality confers a special status that qualifies for exemption from tax liability and the exemption must be strictly interpreted. However, the issue of whether taxed may be levied on transactions between clubs, associations, and its members have always been a cause of conflict. In this regard, the apex court in the case of State of West Bengal & Ors. v. Calcutta club limited, held that there can be no sale of goods or provisions of services between incorporated associations and their member owing to the doctrine of mutuality which regards such associations and its member as one person.

Meanwhile, Explanation 3 to section 65B(44) of the Finance Act, 1994 creates a deemed fiction of supply of services as regards activities between an unincorporated organization and its members. Explanation 3(a) defines an unincorporated organization or a group of persons, as the case may be, and each of its members is treated as a distinct person. Furthermore, new sub-clause ‘aa’ to section 7 of the CGST states that the organization and its member shall be deemed to be two separate persons and the supply of activities or transaction inter se shall be deemed to take place from one person to another person.

Therefore, the contention raised by the KHCAA in the case of Kerala High Court Advocates' Association & Anr. v. Assistant Commissioner, SGST Department & Ors., that a levy of GST for providing facilities to its member would attract the principle of mutuality as there could be no supply of goods from the association to its member cannot be sustained in light of new sub-clause ‘aa’ to section 7 of the CGST. Therefore, tax will be imposed on the supply of services by an association to its members.

3. Inapplicability of Old Provisions as Regards Registration of Charitable Trust or Organization

According to the Finance Act, 2020, all the existing charitable institutions which are registered under section 12 AA of the Income Tax Act 1961 (Income Tax Act) need to register under section 12 AB of the Income Tax Act to continue availing exemptions under sections 10 and 11 of the said Act. As a result, section 12 AA would become redundant and new section 12AB will come into force, in its place. The above section came into effect from June 1, 2020 and all the existing institutions or trusts are now required to renew their registrations under the new provision. In the case of Kerala High Court Advocates' Association & Anr. v. Assistant Commissioner, SGST Department & Ors. (supra), the petitioner raised a contention that KHCAA was engaged in charitable activities and the Income-tax Department had issued registrations under section 12 AA of the Income Tax Act. Therefore, the KHCAA would be exempted from paying any income tax.

However, with the new rules under the Finance Act, 2020 coming into effect from June 1, 2020 which compulsorily requires renewal of all the existing charitable trust or institution registration under section 12AB to continue availing tax benefits, the KHCAA can be exempted from any tax liability only after registration under the new provision and not before that.

Conclusion

In light of the above, it can be concluded that the contention raised by the petitioner in the case of Kerala High Court Advocates' Association & Anr. v. Assistant Commissioner, SGST Department & Ors. (supra) will not be sustained because of the amended provisions of the CGST (specifically insertion of sub-clause ‘aa’ to section 7 which provides that an organization and its members will be deemed as separate persons). Therefore, the supply of services made by the KHCAA to its members will not be considered as services to one single person and doctrine of mutuality will be inapplicable. Thus, tax will be leviable.

Also amendments to the Income Tax Act via insertion of new section 12 AB require registration of trust or institutions under it for such entities to continue availing of tax exemptions. Given that KHCAA is still to register itself under the under section 12AB of the Income Tax Act, KHCAA’s contention before the Kerala High Court seems unsustainable. Furthermore, the doctrine of mutuality will also be inapplicable in light of the new sub-clause ‘aa’ to section 7 of the CGST.

The author, Pulkit Arora, is a third year student of the Institute of Law, Nirma University.