High Court challenges levy of GST on incorporated clubs

High Court

The levy of goods and services tax (GST) on incorporated clubs has been challenged before the Madras High Court as unconstitutional by the Ooty-based Ootacamund Club.

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The provisions of the Central GST Act, to the extent that they seek to levy goods and services tax on “members’ club in an incorporated form” are ultra vires the Constitution of India, the petitioner asserts.

The Bench of Chief Justice Sanjib Banerjee and Justice Senthilkumar Ramamoorthy issued notice in the matter on Wednesday to both Central and State authorities after brief submissions made by advocate Suhrith Parthasarathy for the petitioner-club.

The petitioner’s case is premised upon the contention that the principle of mutuality applies to clubs of an incorporated nature such as the Ootacamund Club, which was incorporated in 1889 and also registered as a company under Section 25 of the Indian Companies Act, 1956.

Members of the club are shareholders in the club, forming an integral part of the club, thereby constituting a single entity, the petition highlights.

While so, it is exempt from service tax and its activities cannot be covered under the definition of “supply” of goods under the Central and State GST Acts. This is because the principle of mutuality entails an exemption from service or sales tax, given that service or sales transactions must involve two or more persons or entities.

“The principle of mutuality posits that a person or an entity cannot make a profit from himself or itself. An amount received from oneself cannot be regarded as income, just as an act of serving oneself cannot be regarded as provision of service, amendable to any form of taxation. In the petitioner’s submission, since it is a club governed by the principle of mutuality, any transaction by the petitioner with one of its members is not a transaction between two parties and is not amendable to levy of GST. This contention is strengthened by the decision of the Supreme Court in Calcutta Club Limited,” the petitioner has explained.

Since the club’s services are only for members, and since both the club and its members are viewed as one entity, the question of GST does not arise because the principle of mutuality is clearly applicable, it has been submitted.

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