Citing Section 21(b) of the Chit Fund Act, 1982, which places a cap on the service fees that can be collected by a foreman to 7% of the gross chit amount, the High Court of Andhra Pradesh (Amaravati Bench) ruled that the interest or the penalty recovered by a foreman from a defaulting chit subscriber would clearly fall under Entry No.27 of the notification No.12 of 2017.
In such a situation, the Court, therefore, clarified that 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).
Accordingly, the Court held that the interest or penalty recovered by a foreman, on account of defaulting payment of instalments, cannot be treated to be a service fee or another charge, mentioned in the definition of interest, in the notification No.12 of 2017.
The Division Bench comprising Justice R Raghunandan Rao and Justice T C D Sekhar observed that there is no dispute that the petitioner is liable to pay GST on the remuneration or commission paid to the foreman under Section 21(b) of the Chit Fund Act, 1982.
Reference was made to the decision of the Supreme Court in the case of Oriental Kuries Limited vs. Lissa & Ors (2019) 19 SCC 732, where it was held that the chit amount paid out to a prized subscriber is in the nature of a grant of a loan and the same can be recovered by the foreman by treating the same as a debt.
Therefore, the Bench set aside the findings of the AAR and AAAR, and concluded 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.
Briefly, the petitioner is a chit fund company. A person (known as Foreman) gathers (enrols) a group of chit subscribers, say 40 members (subscribers), who are willing to pay, say Rs.2,500/- per month, say for a period of 40 months (the number of subscribers in a group and the number of months of the chit group, chit period, is normally the same). For gathering chit subscribers, collecting money from each subscriber, conducting monthly chit auctions (to identify the one subscriber who is entitled to the chit (prized) amount) and disbursing the prized amount, the Foreman is entitled to collect a Foreman commission at 5% of the chit value as per Section 21(1)(b) of the Chit Funds Act, 1982. Each subscriber would be required to pay a maximum amount of Rs. 2,500 for 40 months, and each of the 40 subscribers (identified by lot or chit auction) would be entitled to receive, by turns, the prized chit amount.
Since each subscriber is entitled to receive a maximum prize money of Rs. 95,000 (Rs.1,00,000 of chit value, minus, foreman commission of Rs. 5,000) and re-pay the amount so received, in monthly instalments, normally there would be several subscribers willing to receive at a discount (maximum discount at 40% of the chit value) i.e., less than Rs. 95,000 and re-pay the prized money so received, in monthly instalments. The difference between the maximum amount payable by the Foreman after Foreman’s commission i.e., Rs. 95,000 (Rs.1,00,000 minus 5,000) and the actual prize money receivable by a subscriber, is divided equally amongst all the chit subscribers of the particular chit group, and it is called “chit dividend”.
In certain instances, both the non-prized subscriber as well as the prized subscriber fail to pay the necessary chit instalments. In such a situation, to ensure that the chit schemes do not fail, the foreman makes good the said payments and hands over the prize amount to the prize subscriber, who is entitled to the said prize amount. The money so made good by the foreman is recovered from the said chit subscribers and interest, at the rate agreed upon, would be charged in relation to such late payments or recovery of amounts by the foreman subsequently.
The petitioner therefore applied before the ARA, and it was ruled 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. The AAAR affirmed the order, hence the present petition.
Case Relied On:
Oriental Kuries Limited vs. Lissa [(2019) 19 SCC 732]
Appearances:
Advocate Lakshmi Kumaran Sridharan, for the Appellant/ Taxpayer
GP, for the Respondent/ Revenue
