IMA Kerala Liable to Pay GST on Supply of Goods and Services to its Members: HC

Ernakulam: Dismissing the plea filed by the Kerala Chapter of the Indian Medical Association (IMA), the Kerala High Court recently clarified that the association was liable to pay Goods and Service Tax (GST) on the supply of goods and services to its members. 

IMA Kerala had filed a plea before the High Court challenging its inclusion under the ambit of GST by the Director General of GST Intelligence (DGGI). However, junking its plea, the HC bench comprising Justice Dinesh Kumar Singh upheld the amendment in this regard introduced to Section 7(a) of the Finance Act, which inserted Section 7(aa), was within legislative competence and note ultra vires.

"...the Parliament / State Legislature has amended Section 7(a) by inserting Section 7(aa) by the Finance Act, 2021. The amendment, as held, is neither beyond legislative competence nor offends any of the fundamental rights guaranteed under Part III of the Constitution of India nor is manifestly arbitrary or capricious. Therefore, the amendment brought in Section 7(a) by inserting Section 7(aa) is well within the legislative competence and not ultra-vires," held the HC bench.

However, the Court clarified that the amendment should not have a retrospective effect from July 1, 2017, but it should be applied from the date it was notified i.e. January 1, 2022.

Also Read: IMA Kerala Owes Rs 50 Crore, GST Dept informs High Court

In this regard, the HC bench observed, "However, once the amendment has been brought into statute by inserting Section 7(aa) by the Finance Act 2021, the petitioners have become liable to pay the GST on the supply of goods and services to their members. Section 7(aa) in my view, therefore, should not be given retrospective operation w.e.f 01.07.2017 but it should be given effect from the date when it was notified ie., 01.01.2022."

Medical Dialogues had earlier reported that the association had moved to the High Court bench last year seeking an order restraining the GST Intelligence officials, their men, and agents from provisionally attaching the properties of the association.

IMA filed the plea after the DGGI sent an email to the IMA Secretary and requested a comprehensive list of immovable properties registered under the IMA Kerala branch. Previously, the GST Intel officials had issued a notice to IMA on June 19 requiring compliance with the GST laws.

Last year, DGGI informed the HC bench that the Kerala Chapter of the IMA had Rs 50 crore GST due. Submitting an affidavit, the regional director of DGGI Kozhikode, S Syam Nath had informed the Court that an investigation revealed that IMA Kerala has acquired Rs 280 crores in the last six years through various schemes.

It was further stated that responding to the letter by the GST Department, the association had acknowledged its tax debt. However, no payment was made by the IMA Kerala Chapter.

In its plea before the HC bench, the association had invoked the 'principle of mutuality', essentially meaning that no person can transact with oneself. The association claimed that it was formed exclusively for its members, and therefore exempt from tax. It contended that those who pay and those who benefit are doctors.

Earlier this year, DGGI submitted an additional evidence before the HC bench and claimed that IMA, which comprised of doctors practising modern medicine, was not a charitable organisation but actually a corporate entity involved in product endorsement, land deals, and profit generation.

While considering the question whether all the activities undertaken by IMA involved the supply of goods and services to its members, the HC bench observed,  "The various activities undertaken by the petitioner association have been mentioned in previous paragraphs of the judgment. Therefore, the assessing authority is required to examine each activity independently to arrive at a conclusion as to whether such an activity involves the supply of goods and services so that the tax may or may not be imposed on such activity. However, this court would not like to comment on this aspect, and it is left open to the petitioner to satisfy the assessing authority that the particular activity is not involved in any supply of goods and services."

However, the bench dismissed the plea so far it challenged the constitutionality of Section 7(aa). After the judgment in State of West Bengal v. Calcutta Club (supra), the parliament introduced Section 7(1)(aa) by the Finance Act, 2021, retrospectively that is with effect from the date of commencement of the GST regime ie., 01.07.2017, inserting a legal fiction and artificially deeming a club/association and its members to be two separate persons. The taxable event was also artificially enlarged to include “activities or transactions” between a club/association and its members.

Although the bench upheld the constitutionality of Section 7(aa), it clarified that the provisions of Section 7(aa) will have prospective operation with effect from 01.01.2022. Meanwhile, the bench directed IMA to respond to the show-cause notices and remanded the matter back to the additional director general and deputy director of the Directorate General of GST Intelligence to complete the assessment.

"In view of the aforesaid discussion, the present writ petitions so far as the challenge to the constitutionality of Section 7(aa) is concerned are dismissed. However, it is held that the provisions of Section 7(aa) will have prospective operation with effect from 01.01.2022. Petitioners are directed to file their response to its impugned show-cause notices, and the matters are remanded back to respondents 4 and 5 to complete the assessment. The petitioner shall cooperate with the assessment proceedings. Till the assessment is complete, the interim order passed by this court shall remain in operation," ordered the HC bench.

To view the HC order, click on the below: 

https://medicaldialogues.in/pdf_upload/kerala-hc-ima-gst-245190.pdf

Also Read: IMA not a Charitable Organization, but Corporate Entity: GST sleuths tell high court