GST – First Principles on the term ‘Business’

The objective of this article is to understand the scope and relevance of the term ‘business’ under GST laws and apply it in context of non-commercial institutions such as charitable trusts, NGOs, educational institutions, employee welfare trusts, etc. and mutual associations such as residential welfare associations, trade associations, clubs, societies, etc. GST is generally understood as an amalgam of VAT and Service Tax laws. While most of the VAT laws applied to dealers, which somewhere built in the requirement of business, the service tax laws applied comprehensively to all persons. In this context, it may be gainful to bear in mind that the philosophy of the VAT laws is inherited in the GST law to some extent.

At the outset, it can be argued that the term supply by itself is a commercial term and is generally not used for activities undertaken by non-commercial organisations. Though the term ‘supply’ is defined in a very broad manner, presence of a tinge commercial character in the transaction seems to be essential element (unless specifically made redundant). When examined in the presence of the terms ‘sale’, ‘transfer’, ‘service’, the term supply is narrow if seen from this perspective. It is pertinent to note that the law makers have not used the term ‘activity’ (as was used in the service tax law) but rather chose to use the term ‘supply’ which indicates the intent of the Legislature to narrow down the scope of chargeability on this count. Also, the statutory definition of term supply u/s. 7(1) is further qualified by the phrase ‘in the course of furtherance of business’.

In fact, the term business plays a significant role in the entire definition of ‘supply’ under section 7 which can be analysed as follows:

 (i) The first clause of supply requires that all forms of supply of goods or services should be ‘in the course or furtherance of business’ .

(ii) The second clause dispenses with the requirement that the import transaction should be in the course or furtherance of business; in other words, non-business transactions which are import of services would also be termed as supply.

(iii) The third clause r/w Schedule I enlist transactions entered into without consideration. This clause dispenses with the requirement of consideration flowing between the taxable persons in such transactions. Even though certain entries do not use the term business, there is an implicit requirement of a business activity being present in view of the specific terms such as ‘business asset’, ‘principal’, ‘agent’, etc.

This interpretation leads one to an inference that except in case of import of service (as well as import of goods in IGST transactions), transactions can be termed as a supply only if they acquire the feature of being a business/ commercial transaction. Further analogy can also be drawn from various other definitions / provisions under the GST Law (such as outward supply, capital goods, inputs, composite supply, input tax credit, place of business, etc). None of these terms attempt to administer a non-business transaction. Given the scheme of the law, it would be reasonable to interpret that only transactions in the nature of ‘business’ (except import of service and goods) would have GST implications.

This leads us to question as to whether any boundaries can be drawn over the term ‘business’ under the GST law.

 Definition of ‘Business’

The term business has been defined in an inclusive manner u/s. 2(17) of the CGST Act to include the following activities:

 a)  Any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit

b)  Any activity or transaction in connection with or incidental or ancilliary to sub-clause (a)

 c)  Any activity or transaction in the nature of sub-clause (a), whether or not there is volume, frequency, continuity or regularity of such transaction

 d)  Supply or acquisition of goods including capital goods and services in connection with commencement or closure of business;

 e)  provision by a club, association, society, or any such body (for a subscription or any other consideration) of the facilities or benefits to its members;

 f)   admission, for a consideration, of persons to any premises;

 g)  services supplied by a person as the holder of an office which has been accepted by him in the course or furtherance of his trade, profession or vocation;

 h)  services provided by a race club by way of totalisator or a licence to book maker in such club ; and

 i)   any activity or transaction undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities;

 The primary part of the said definition can be analysed as follows:

 (a) Main activity being in the nature of ‘trade, commerce, manufacture, profession, vocation, adventure, wager or any similar activity whether or not it is for a pecuniary benefit’;

 (b) Incidental/ ancillary activity to the above business activity;

 (c) Main activity constituting business regardless of whether there is volume, frequency, continuity or regularity; and

 (d) Any activity in connection with commencement or closure of business.

A brief history of a similarly worded definition under the VAT laws may assist us in understanding the scope of the term. Historically, the term business was not included in the list of definitions under the Central Sales Tax Act and other General Sales tax legislation. It was in 1959 where the Madras General Sales Tax Act defined this term to include trade, commerce, etc. within its ambit. The definition has evolved over time and attempted to overcome certain infirmities identified by judicial decisions. It would be very interesting to note that the Courts not given an unlimited space to this term even-though the said term was defined in an inclusive manner.

 Legal principles on the term ‘business’

The Central Sales Tax Act, 1956 had defined the said term as follows:

 “‘business’ includes,

(i)  And trade, commerce, manufacture or an adventure or concern in the nature of trade, commerce or manufacture, whether or not such trade, commerce, manufacture, adventure or concern is carried on with a motive to make gain or profit and whether or not any gain or profit accrues from such trade, commerce, manufacture, adventure or concern; and

(ii) Any transaction in connection with, or incidental or ancillary to, such trade, commerce, manufacture, adventure or concern”

The said definition is similar, in terms of coverage, to clause (a) and (b) of section 2(17) of the GST Law. The respective state enactments also had similar definitions with modifications in terms of additional clauses widening the coverage of the term. The debate over the scope of the term business dates back to the decision of the Hon’ble Supreme Court in State of Andhra Pradesh vs. Abdul Bakhi And Bros [1964] 15 STC 644 (SC), wherein the Court held that the expression “business” though extensively used as a word of indefinite import, in taxing statutes it is used in the sense of an occupation, or profession which occupies the time, attention and labour of a person, normally with the object of making profit. To regard an activity as business there must be a course of dealings, either actually continued or contemplated to be continued with a profit motive, and not for sport or pleasure.

In another decision (prior to the insertion of expansive clauses of incidental/ ancillary activity), the Hon’ble Supreme Court in Raipur Manufacturing Co. Ltd’s case ([1967] 19 STC 1 (SC)) was examining whether discarded machinery, sale of waste, scrap or unserviceable material and by-products fall within the scope of the term ‘business’. The assessee contended that it was not engaged in buying and/or selling of such material and the said material was not sold with an objective of profit. The Court observed that the term ‘business’ does not hinge solely on the motive of earning profit though it predicates a motive which pervades a whole series of transactions effected by the person. The Court observed that though the volume and frequency of the transaction was high, the taxable person cannot be said to have the intention of carrying on business of such items. Though the residuary price may impact the profit and loss account by reducing the costs, that does not by itself establish an intention to carry on business in that product.

 They are either fixed assets of the Company or are goods which are incidental to the acquisition or use of stores or commodities consumed in the factory. Those goods are sold by the Company for a price which goes into the profit and loss account of the business and may indirectly be said to reduce the cost of production of the principal item, but on that account, disposal of those goods cannot be said to become part of or an incident of the main business of selling textiles. In order that receipts from sale of a commodity may be included in the taxable turnover, it must be established that the assessee was carrying on business in that particular commodity, and to prove that fact it must be established that the assessee had an intention to carry on business in that commodity. A person who sells goods which are unserviceable or unsuitable for his business does not on that account become a dealer in those goods, unless he has an intention to carry on the business of selling those goods.

In the same judgement, the Court also held that sale of by-products (caustic liquor) was an incident of the manufacturing activity of the Company and was includible in the definition of business under the Bombay Sales Tax Act under the primary clause itself.

 ‘For reasons which we have already set out in dealing with “kolsi”, we are of the view that waste caustic liquor may be regarded as a by-product or a subsidiary product in the course of manufacture and the sale thereof is incidental to the business of the Company and the turnover in respect of both “kolsi” and “waste caustic liquor” would be liable to sales tax.’

Subsequently, in the post amendment period, the Hon’ble Supreme Court in Burmah Shell Oil Storage and Distributing Co. of India ltd. [1973] 31 STC 426 (SC) settled some conflicting High Court decisions and held that the amendment in 1964 has made the intention of profit as an unnecessary criteria not only to the primary clause, but also to the secondary clause of the definition of business. In view of this amendment, canteen sales, sales of advertisement materials and scrap sales were held to be taxable under the post amendment period even if they were not conducted with the object of making profit. Though the decision of Raipur Manufacturing (supra) was held to be not applicable as regard the intention of profit, in the view of the author, the intention of carrying on trade, commerce which was cited in the said decision is still relevant.

In a landmark decision of State of Tamil Nadu and Another Versus Board of Trustees of the Port of Madras, the Court was examining the taxability of sale of uncleared or abandoned items by a Port established under a statute performing statutory functions without any objective of making profit. It was held that, if the main activity was not business then any connected or incidental activity of sales would not amount to business unless an independent intention to conduct business is these connected activities is established. In this backdrop, the Court held that Port Trust was not engaged in business and hence the activity of sale of uncleared or abandoned items cannot be termed as a business activity. This ruling is very important in the context of educational, social and charitable associations and discussed in later paragraphs.

In another decision in Board of Revenue vs. A. M. Ansari [1976] 38 STC 577 (SC), auction of forest produce was held not to be regarded as a business activity in the absence of a frequency of such activity. The Supreme Court held that volume, frequency, continuity and regularity of transactions in a class of transactions should ordinarily be undertaken to be termed as a business activity.

Application of legal principles of the definition of business under GST Law

The first clause of the definition is the bedrock on which most of the clauses of definition rest upon. Except for the inclusion of profession, vocation, adventure, wager, etc., the said clause is more or less similar to the definition of the business in the central sales tax and state sales tax statutes. The clause should be understood in a commercial sense (as understood by the Supreme Court in Abdul Bakshi’s case supra) except for the requirement of a profit motive. The clause renders the intention of making pecuniary benefits as an irrelevant factor in deciding whether an activity is business. Each of the words in this clause could be attributed a meaning as follows:

–   ‘trade’ primarily refers to exchanging of goods for goods or goods for money with a secondary meaning of being a repeated activity carried on with a profit motive which is distinguished from agriculture, etc; but in the context of this Act should also refer to provision of services and not merely goods

– ‘commerce’ refers to a larger volume of trade though there is not specific scale when a trade is termed as commerce. 

–   ‘manufacture’ has been used to cover manufacturing activities which do not fall within the contours of the term ‘trade’.

–  ‘profession’ would refer to an occupation requiring intellectual skill or any other manual skill controlled by intellect.

–   ‘vocation’ refers to calling or the way in which an individual passes his/her life; but in the context of the previous terms should be understood to refer to activities such as sports, art not undertaken as a professional but for recreation or pleasure.

–  ‘adventure’ would refer pecuniary risks, a venture, a speculation in which there is considerable risk of loss as well as a chance of gain; and in the context of the previous terms should be understood as having a feature of trade, commerce, manufacture, etc. say conducting research activities connected or not with the primary business.

–   ‘wager’ would refer to betting activities where the possibility of success is highly uncertain.

The second clause includes activities which are incidental to the primary business activity. The said clause emphatically requires that the primary activity should be in the nature of business for the incidental activity also to be included in the definition. This is in line with the principles laid down by the Madras Port Trust’s case where the primary activity of the Trust was of non-business character. As rightly pointed out in the decision, this conclusion should be reached only after ensuring that the incidental activity should not be an independent activity to fall within the first clause itself.

The third clause makes the frequency, continuity or regularity of the primary activity as irrelevant in deciding whether the activity is in the nature of business, in other words occasional transactions. This clause overcomes the Supreme Court’s view in H.A. Ansari’s case which required that there should be some regularity in dealings for the transaction to be a business and also overcomes a contention of the assessee that they are not ‘carrying on’ (a degree of continuity) a business activity.

The fourth clause specifically includes any transaction in connection with commencement or closure of business. The purpose of this clause is to remove any ambiguity over such transactions to be ‘in the course’ of business. Such transactions though strictly not in the course of business would also be included in the definition of business. Similarly, transactions which relate to closure of business would be included though they are strictly not ‘in the course or furtherance of business’.

It can be inferred that the legislature has intended to cover transactions even having a remote connection with a business activity and also made the stage of business irrelevant for the definition of business. As a consequence, the legislature has widened the scope of items which would be governed under the law. Further, a definition of wide import would ensure all transactions are eligible for the benefit of input tax credit since the eligibility of input tax credit (like taxability) revolves around the transactions being in the ‘course or furtherance of business’. Having said this, a question arises whether the definition has implicitly excluded non-commercial activities which are undertaken by social, charitable or public organisations from its scope. While the definition is qua the activity, in the view of the author, the status of the organisation performing the activity should also be kept in mind to understand the intention behind the activity. A discussion based on the above thought process has been attempted below.

Charitable Trusts and Charitable Activities

The GST Law has conferred certain exemptions on specified services by charitable organisations; one exemption is with reference to services of an entity registered u/s. 12AA of the Income-tax Act, 1961 (IT Act) by way of charitable activities; the other is for services by way of conducting religious ceremonies, renting of religious place meant for general public and owned or management by an entity registered u/s.12AA or section 10(23C) of the IT Act, provided the rental charges for the room/ hall, etc. are within the specified limits. The exemption entries are fairly narrow in its scope and may result in taxation of other non-commercial activities.

The former exemption entry grants benefit on two counts i.e. (a) the service should be provided by a 12AA registered entity and (b) such activities are in the nature of charitable activities. One aspect (i.e. the subject) has been borrowed from the IT Act while the other aspect (i.e. the subject matter of taxation) has been provided under said notification itself by way of an explanation.

The coverage of the first aspect of the exemption entry is purely dependent upon the status of the registration u/s. 12AA of the IT Act. The Income-tax Act provides that exemption would be available on specified incomes of charitable or religious trusts under the provisions of section 11 and 12 provided such eligible trusts are registered u/s. 12AA of the IT Act. The trust may or may not be enjoying complete exemption from income tax (say in view insufficient recoupment of income for charitable purposes, etc.). As long as the trust is holding a valid 12AA registration certificate, it meets the requirement of the first part of the exemption entry and the said entity would continue to be covered under the said clause. Therefore, religious trusts, though not strictly carrying charitable activities exclusively, would still be covered under this clause, since 12AA registration is applicable even for religious trust.

The other aspect is with reference to the scope of services which are eligible for such exemption. The trust which is registered u/s. 12AA is eligible for exemption only for services ‘by way of’ charitable activities. Charitable need not always mean free or without consideration; charitable would also refer to subsidised or at minimal costs with an intent to grant a benefit to the recipient over and above what is charged for that activity. This entry grants exemption from GST on recoveries from such activities as long as the activities are for charitable purpose i.e. public health and awareness in respect of specific diseases; advancement of religion, spirituality or yoga, educational or skill development programmes for specified persons and preservation of environment.

The said exemption entries are narrow in the sense that not all social activities would fall within the term ‘charitable activities’. The larger question that arises is whether an entity not registered u/s. 12AA or engaged in activities which are not within fold of ‘charitable activities’ under the exemption notification be liable to GST at all. Framing a legal proposition, would a non commercial entity engaging in public service, irrespective of whether registered u/s. 12AA of the IT Act or not, be liable to be taxed under GST. Two simple examples can be taken:

Example 1 – Old Age Homes under a Charitable Trust (whether registered u/s. 12AA or not)

ABC trust is owning and operating old-age or orphanage homes. The said Trust owns the land, buildings and the proceeds from such trust are necessarily required to be applied for the primary object of the Trust. The Trust has the following sources of receipts – (a) maintenance charges for the persons admitted at the old age home; (b) renting of precincts to third parties for their commercial activities; (c) sale of handmade goods by old age persons; etc. Admittedly, the trust is not a commercial concern though it is engaging in certain income generating activities. Clause (a) of the definition requires that there should be an activity in nature of ‘trade, commerce, etc’ with or without a pecuniary benefit. Though the intention of profit has been made irrelevant, the intent to engage in business has not been dispensed with (refer analysis above) in Burmah Shell case. Moreover in the Madras Port Trust case (supra) the Court held that mere sale of articles cannot by itself be termed as business unless there is an intention to engage in such activity. The Hon’ble Supreme Court in Commissioner of Sales Tax v. Sai Publication Fund [2002] 126 STC 288 (SC) applying the Madras Port Trust case has held a similar view. Hence, it can be argued that the Old age Trust should not be subject to any GST on such transaction even though they are income generating activities i.e. any sale or service cannot be equated to a business activity, especially in the absence of an intention to engage in such activity as an occupation.

Example 2 – NGO engaged in Charitable activities organising a Marathon (whether registered u/s. 12AA or not)

An NGO which is registered as a 12AA trust and engaged in charitable activities relating to public health. The NGO conducts a marathon for collection of funds and uses the same for charitable activities¹. The NGO collects participation fee for the marathon and also receives other income from sponsors and advertisers. The said income is then deployed for charitable activities. The activity may or may not be an isolated/ non-recurring activity for the NGO. Applying the definition of supply and business, the question that needs to be answered is whether the aforesaid income can be said to be part of a trade/ commercial activity and subjected to GST. Going by the rationale in the previous case study, a stand can be taken that the NGO is not engaged in trade, commerce, etc. Though clause (c) taxes transactions which are non-recurring, such transactions should first qualify as a business transaction as per clause (a). The marathon activity by the NGO cannot be termed as a trade, commerce activity and hence the NGO cannot be termed to be in business. However, this is different from an organisation which organises a marathon and as a practice chooses to donate a portion of proceeds for a particular social cause. The differentiating factor is the intent behind the activity which continues to be highly relevant in the scheme of the definition of business, though the proceeds may meet the same end-use.

____________________________________________________________________________________________

 1   There is a thin line of difference between services ‘for’ charity and service ‘by way’ of charity.  The exemption entry only covers the latter but not the former.

 Example 3 – Employee Welfare Trust

Companies establish welfare trusts wherein the employees compulsorily contribute a nominal sum towards membership fees. The trust is established with an objective of medical aid, scholarships to employees or their dependants. The trust cannot be said to be engaged in a trade, commerce or such activity and may not fall within the scope of the term supply. Moreover, the membership fee is strictly not a consideration since the amount is not paid for a direct inducement of a supply of service of goods rather it merely establishes an eligibility at the employees to claim a benefit provided by the trust.  It can therefore be argued that the Trust is not liable for payment of GST.

In summary, the status of the entity, its objective (incl. that enshrined in charter documents), pattern of dealings and the importance of the transaction in the scheme of objects would all play a role in deciding the intent behind the transaction. As repeatedly held by Courts, the onus of proving taxability qua business transaction is on the revenue contending the taxability. Similarly, there is a very good case to argue that the welfare trusts, social trusts and institutions claiming income tax exemptions u/s. 10(23C), whether charitable or not, can still be said to be outside the ambit of GST unless they undertake activities which are predominantly in the nature of trade, commerce, etc.

 Mutual Associations (Trade/Non-Trade), etc.

The fundamental requirement for a transaction to be termed as ‘supply’ in section 7 of the GST law is the existence of two or more transacting parties (with or without consideration). The definition of business includes a provision of a facility/ benefit by a club, association, society or such mutual benefit body as ‘business’. The question arises is whether in view of this inclusion any activity by a mutual concern (such as clubs, resident welfare associations, etc.) to its members results in a levy of GST on the services of such concerns. In order to answer this question, it may be essential to relook at the principles under income tax and erstwhile service tax regime.

 Mutuality Principles under Income Tax Law

Mutual societies are formed by pooling resources for the common benefit of all its members. The mutual societies could be incorporated or otherwise and it would not alter the concept of mutuality. Under income tax, an association of members forming a mutual group is not taxable on the surplus resulted in the hands of the association on the doctrine of mutuality. This is based on the concept that no one can profit from himself or trade with himself. The profit or surplus merely indicates that the members have over-charged themselves and they continue to have a right of disposal over the surplus or even wind up such surplus.   

The Hon’ble Supreme Court in Commissioner of Income-Tax vs. Bankipur Club [1998] 109 STC 427 (SC) laid down certain requirements to claim the benefit of mutuality:

–    Complete identity of the contributors and the participators i.e. contributors to the common fund and the participators in surplus should be an identical body

–    Legal form of the association is immaterial

–    Mere fact that some of the members take  advantage of the activities while the others having the right to do so do not avail of this, does not affect mutuality

–    If money is realised from members and non-members for the same consideration by giving alike facilities to all, it evidences profit earning motive and commerciality and mutuality cannot be said to exist (Commissioner of Income-Tax, Bombay City vs. Royal Western India Turf Club Ltd. AIR 1954 SC 85).

 The relevant extract of the judgement is :

“………if the object of the assessee-company claiming to be a “mutual concern” or “club”, is to carry on a particular business and money is realised both from the members and from non-members, for the same consideration by giving the same or similar facilities to all alike in respect of the one and the same business carried on by it, the dealings as a whole disclose the same profit-earning motive and are alike tainted with commerciality. In other words, the activity carried on by the assessee in such cases, claiming to be a “mutual concern” or “members’ club” is a trade or an adventure in the nature of trade and the transactions entered into with the members or non-members alike is a trade/business/transaction and the resultant surplus is certainly profit income liable to tax……”

In a more recent case of Bangalore Club vs. CIT [2013] 350 ITR 509 (SC), the Court denied the benefit of mutuality on the basis that surplus funds which were loaned to a member bank against interest were at the disposal of such member who used it for commercial operations. In other words, diversion of funds to third parties or even members for exclusive use would adversely affect the concept of mutuality and taint the society with a commercial nature, though to the extent the mutual operations continue, such benefit would be available. 

Mutuality Principles under Service Tax Law

The service tax law vide Finance Act, 2006 and subsequently in the negative list scheme had by insertion of an explanation treated a club or association and its members as distinct persons. The explanation was attempted to dissect the principle of mutuality and impose service tax on the services of a club or association to its members. A dispute arose with regard to the impact of the explanation on the club or association services provided by such mutual associations. The High Court in Ranchi Club Ltd vs. CCE, Ranchi (2012) 26 STR 401 (Jhar) differentiated between a ‘members club’ and a ‘propreitory club’ for incorporated associations. In a members club, every member is a shareholder and every shareholder is a member with no third party transaction and there is no separate legal person in such case. However, in a propreitory club, where certain shareholders are members or certain members are shareholders; or members are not owner of the property of the club, then the club and its members are distinct persons. The Court followed the decision of the Supreme Court in Joint Commercial Tax Officer vs. The Young Men’s Indian Association – 1970 (1) SCC 462, which held that in a member’s club, the club is merely acting as an agent for its members in the matter of supply of various preparations and there could not be a ‘sale’ in such arrangements.

In order to tax a mutual concern, it is imperative that the legislature breaks through the concept of mutuality by fictionally delinking the mutual society from its members. In the current GST law, the provisions do not fictionally define the club or its members as distinct persons or alter the status of mutuality, The inclusion in the definition of business merely treats the activity as a business activity. Neither does the current definition of ‘supply’ nor the charging section of GST law treat the club and its members as distinct persons. In fact, the case of seeking GST from clubs or mutual society is on a weaker footing in comparison to the service tax law as there is no parallel to Explanation 3 of section 65B(44) of the Finance Act, 1994, in the current GST law. In fact, in few specific instances, the deeming fiction to treat branches in two States or in two countries as distinct persons or supplies between principal and agent as deemed supplies has been introduced. In the absence of such deeming fiction, it can be argued that the limited role which the said clause performs is include the activity as a business activity for the club, association or mutual society. The said analysis could be applied in the following case studies:

Example 1 – Resident Welfare associations (RWAs)

RWAs are established for the mutual welfare of the residents of a particular locality. RWAs collect maintenance fees, rent out space for commercial establishments, hoardings, etc. The said associations are formed by the residents with periodical contributions which are utilised for the maintenance of common areas of the resident establishment. In the process, it derives income from third parties from the common area but for the sole purpose of reducing the maintenance costs to residents of the establishment. Section 7 defining supply requires that there has to be a supply to another for consideration for it to be termed a supply. The maintenance fee collected by the RWAs from its members cannot be termed as a transaction between two parties (in view of the concept of mutuality) and consequently be outside the scope of taxability. The exemption entries for RWAs (Rs. 5,000/- per month) may really not have any application to associations which are conforming to the concept of mutuality.

Renting service by the RWAs to third parties would not fall within the concept of mutuality. Yet, in such transactions, a contention can be made that the renting services by RWAs are for the purpose of reduction of costs of the RWAs and therefore not a business activity in the sense of being a trade, commerce, etc. It may also be noted that section 2(17)(e) covers only services and facilities to members within the scope of business and not services and facilities to non members.

Another example would be with respect to the club facilities which are housed in the RWAs. If the in-house club is maintained and operated by the third party and the association merely rents out the place which houses the club, the principle of mutuality would not apply and GST would be applicable on the services rendered by the third party club. But where the club is being operated by the association itself, the ground of mutuality can certainly be taken and GST may not apply in such circumstances.

Example 2 – Clubs or association services (RWAs)

Clubs provide several facilities to its members including recreation, restaurants, renting of space, etc. Member’s clubs operate on the principle of mutuality, own properties on behalf of the members and hold the funds/ contribution for the members. The club would have to conforn to the conditions to establish mutuality based on the principles in Bankipur’s case. While article 366(29A) contains a specific clause to tax on ‘supply’ of goods by an unincorporated association or body of persons to a member for consideration as a sale of goods by such association to its members, the said clause cannot on its own trigger taxation in GST regime on account of the following reasons:

2   It may be noted that this matter has been referred to a larger bench of the Supreme Court vide decision [2016] 96 VST 20 (SC) State Of West Bengal And Others vs. Calcutta Club Limited, but in the view of the author, the decision of the Calcutta High Court states the correct position of law.

–  The effect of the deeming fiction of Article 366(29A) has not been percolated in the GST law in the definition of supply or taxable persons (and only in a limited way in Schedule II of the Act). The requirement of two persons and a consideration in mutual societies is still wanting in the current GST law.

–  Article 366(29A) applies to ‘supply of goods’ and does not apply ‘supply of services’ – also refer Entry 7 of Schedule II of the GST law. Therefore, a restaurant services by a mutual society is deemed to be a supply of service & would not be covered by the said entry.

–   Section 25(4) and (5) of the GST law does not seem to cover the aspect of distinct persons for a club and its members.

The author does see a certain challenge in taking the stand over non-taxability in view of entry 3 of Schedule I which deems a supply of goods by an agent to its principal as a GST transaction. This is in view of the Court observations that clubs operate as an agent of the members in performing its function. But it may also be noted that the definition of ‘agent’ does not strictly cover the classes of persons like a club, society, etc. and hence, may stand excluded.

The exercise of examining the business aspect of a transaction is a double-edged sword since any attempt to exclude an act from the term business would have potential consequences over the input tax credit claim u/s. 17(1), on the ground of it being used either wholly/ partly for a non-business activity.

This is on the basis that an input or input service or capital goods on which credit is proposed to be claimed should necessarily be used ‘in the course or furtherance of business’ for it to be eligible for credit. But there would certa inly be fresh litigation on the definition of business and last word is far from being stated.