Court Rules Foreman Interest on Defaulted Payments as Debt, Not Service Fee
In a landmark judgment, the Andhra Pradesh High Court has ruled that the interest and penalty recovered by the foreman of a chit fund from defaulting subscribers are exempt from Goods and Services Tax (GST). The decision comes in the case of M/s. Ushabala Chits Pvt. Ltd. v. Commissioner Of State Tax, where the court overturned previous rulings by the Authority for Advance Ruling and the Appellate Authority for Advance Ruling that classified such interest and penalties as taxable service fees.
The petitioner, Ushabala Chits Pvt. Ltd., challenged the imposition of GST on amounts collected as interest and penalty from subscribers who defaulted on their monthly installments. The High Court examined whether these amounts constituted a supply under GST and whether they fell within the scope of taxable services or qualified for exemption under the relevant notification.
The court relied on Entry No.27 of Notification No.12 of 2017, which exempts services related to deposits, loans, or advances in so far as the consideration is represented by way of interest or discounts. The bench, consisting of Justices R. Raghunandan Rao and T.C.D. Sekhar, determined that the interest charged on defaulting payments did not constitute a service fee for the foreman's services, but rather as interest on debt, aligning with the definition provided in the notification.
The court drew upon precedents, including the Supreme Court's judgment in Oriental Kuries Limited v. Lissa, where it was established that a chit fund's prize amount is akin to a loan and future installments are considered a debt. This reinforced the view that the interest charged by the foreman on delayed payments is not a service fee but a debt recovery mechanism.
The ruling emphasizes the distinction between foreman commission and interest on defaults, clarifying that the latter does not fall under the taxable service fee category capped under Section 21(b) of the Chit Funds Act, 1982. The court further noted that the interest and penalty do not exceed the cap of 7% set for commissions, thereby affirming their exemption from GST.
This judgment is significant for chit fund operators across India, offering clarity on the taxation of amounts recovered from defaulting subscribers. The decision effectively nullifies the earlier GST liabilities imposed by the advance ruling authorities and sets a precedent for treating such collections as exempt under the current GST framework.
With this ruling, the writ petition filed by Ushabala Chits Pvt. Ltd. is allowed, providing relief from GST on interest and penalties collected due to defaults in chit fund installment payments.
Bottom Line:
The interest and penalty recovered by a foreman of a chit fund from defaulting subscribers, in relation to default in payment of installments, falls under Entry No.27 of Notification No.12 of 2017 and is exempt from GST.
Statutory provision(s):
- Chit Funds Act, 1982 Sections 21(b) and 21(c)
- Notification No.12 of 2017 Entry No.27
- Goods and Services Tax Act
