GST Not Leviable On Interest/Penalty Charged By Chit Fund Companies For Delayed Payment Of Monthly Subscriptions: AP High Court

Justices R. Raghunandan Rao and T.C.D. Sekhar examined whether the interest/penalty collected for the delay in payment of the monthly subscription by the members forms a supply under GST.

In the case at hand, the petitioner was a chit fund company engaged in the business of running chit schemes. The conduct of chits is regulated by the Chit Fund Act, read with the Andhra Pradesh Chit Funds Rules, 2008.

The petitioner, with a view to having clarity whether any GST is payable on such interest/penalty for delay in payment of subscription amount, had approached the Authority for Advance Ruling on this issue.

The Authority for Advance Ruling held that the additional amount being charged on delayed payment, which is termed as interest, late fee and penalty, would have to be treated as a part of the value of the service, and the GST would be liable on such amounts charged on delayed payment.

Aggrieved by this Order, the petitioner approached the Appellate Authority for an Advance Ruling. The Appellate Authority for Advance Ruling affirmed the Order of the Authority for Advance Ruling.

The counsel for the petitioner, relying upon Sl. No.27 of the exemption of the notification No.12/2017CT(Rate), dated 28.06.2017, contends that the interest collected by a chit fund company from defaulting subscribers is covered by the said entry. The amount payable by the defaulting subscribers would have to be treated as a debt, and interest payable on such debt would not attract the levy of GST.

It was further argued that the consideration for service offered by the foreman, for conducting the chit, is paying separately to the foreman, and the interest payable on the delayed payment of chit subscription amounts cannot be treated as part of the consideration paid to the foreman for his services and running the chit.

As per the petitioner, the payment of interest and penalty, on delayed payment of instalments, even if termed to be consideration for a service given by the foreman, would still be exempt from payment of GST on account of the exemption granted under the Notification No.12 of 2017.

The bench noted that under the Notification No.11 of 2017, dated 28.06.2017, the consideration paid for services provided by a foreman of a chit fund, in relation to a chit, is exigible to tax.

The bench stated that Section-21 of the Chit Funds Act, 1982, sets out the rights of a foreman. Section 21(b) places a cap on the service fees that can be collected by a foreman to 7% of the gross chit amount. In such a situation, the right to interest and penalty, if any, payable on any default in payment of instalments set out in Section 21(c) falls outside the purview of commission or remuneration specified in Section 21(b). Further, the cap of 7% set out in Section 21(b) would be a bar to the foreman to recover interest and penalty under Section 21(c).

The bench opined that the interest or penalty recovered by a foreman, on account of defaulting payment of instalments, cannot be treated as a service fee or another charge, mentioned in the definition of interest, in the notification No.12 of 2017.

The bench held that the interest and penalty recovered by a foreman, in relation to default in payment of instalments, would not be exigible to tax under the GST Act.

In view of the above, the bench allowed the petition and quashed the findings of the Authority for Advance Ruling and the Appellate Authority for Advance Ruling.

Case Title: M/s Ushabala Chits Pvt. Ltd. v. The Commissioner of State Tax

Case Number: WRIT PETITION No.14745 of 2021

Counsel for Petitioner/Assessee: Lakshmi Kumaran Sridharan

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