What’s in a club

A unique feature of indirect tax laws is that they impact small service providers the most. One of the first groups to approach the Supreme Court under the erstwhile service tax laws was an association of Kalyana Mandaps in Tamil Nadu.

Clubs and associations have had their share of litigation on whether an indirect tax would be applicable on the services they provide to their members. It was assumed that indirect taxes would not be applicable on the doctrine of mutuality — one cannot trade with oneself. On the other side, the Service Tax Department was operating on the doctrine of tax collectability — anything with a whiff of a service element was taxable.

As it often happens, such seemingly simple matters are made complex through different interpretations resulting in litigation that travels all the way to the Supreme Court.

Some delays are inevitable at the Apex Court since they need to decide on an array of matters.

The issue regarding levy of indirect tax on the services provided by clubs and associations reached the Supreme Court in the service tax era. A decision was given in the GST era.

In the case of Calcutta Club, the Supreme Court held that the very core of the concept of mutuality is that a man cannot trade with himself. The Court had held that a club acts as an agent of its members and there is no exchange or flow of consideration due to which no indirect taxes could be levied.

They went one step further and ruled that the doctrine of mutuality continues to be applicable to incorporated and unincorporated members’ clubs even after the 46th Amendment to the Constitution which brought in the GST era.

Usually, the Tax Department’s response to the Supreme Court’s decision are mixed and depend on the impact of the decision on their revenues. When they are happy with a decision, they amend the laws accordingly. When they are unhappy, they do not bring in any amendments so that the earlier law continues. When they are extremely unhappy with a decision, they amend the law with retrospective effect. They have chosen the last option for levy of GST on the services provided by clubs and association.

Notification No 39/2021 dated December 21, 2021 notifies January 1, 2022 as the date from which the new Section 7 (1)(aa) would come into effect. This section states that 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 would constitute a supply.

Notification googly

To neutralise the argument of mutuality that clubs would bring forth, the Notification clarified that 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. Just to ensure that the message gets across loud and clear, they have amended the Section retrospectively from the day GST was launched — July 1, 2017. One can visualise show-cause notices being prepared in Tax Departments across the country.

When the GST was introduced, the Tax Department borrowed many provisions from service tax laws.

When the time came to interpret the same provisions, the Tax Department opines that both laws are completely different and the provisions have to be read de novo .

Ideally, when two laws are based on similar concepts, repeat litigation on controversies that have been decided should be minimal.

Unfortunately, this does not seem to be possible under the GST. It is going to be only a matter of time before a club approaches the Supreme Court again on this topic.

Clubs and associations across the country would be hoping that when this happens, the Apex Court sticks to its original position.

The writer is a chatered accountant

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