GST Not Payable On Interest, Penalty For Delayed Chit Payments: Andhra Pradesh High Court

The Andhra Pradesh High Court has recently held that interest and penalties collected by a chit fund foreman from subscribers who delay payment of installments do not attract Goods and Services Tax, ruling that such amounts are exempt under GST law.

A Division Bench of Justice R. Raghunandan Rao and Justice T. C. D. Sekhar said the foreman is legally required to ensure timely payment of the prize amount even if subscribers default.

On this basis, the court, setting aside the rulings of the Authority for Advance Ruling and the Appellate Authority, held,

“The interest and penalty recovered by a foreman in relation to default in payment of installments would not be exigible to tax under the GST Act.”

The case was filed by Ushabala Chits Private Limited, a chit fund company governed by the Chit Funds Act, 1982 and the Andhra Pradesh Chit Funds Rules, 2008.

The company had approached the tax authorities to clarify whether GST was payable on interest, late fees and penalties charged when subscribers delayed their chit payments.

The Authority for Advance Ruling held that these charges formed part of the value of the foreman's services and were therefore taxable, a view later upheld by the Appellate Authority.

Before the High Court, the chit fund company argued that interest collected from defaulting subscribers arises from a debt and not from any service rendered by the foreman. It contended that the foreman's remuneration for conducting the chit is separately capped under the statute and that interest on delayed payments cannot be treated as consideration for running the chit.

The tax department, on the other hand, argued that since the foreman is statutorily entitled to recover interest and penalty, such amounts should be treated as service fees and taxed accordingly.

Rejecting this view, the High Court relied on the Supreme Court's ruling in Oriental Kuries Limited v. Lissa, which held that the chit amount paid to a prized subscriber is in the nature of a loan and gives rise to a debt. Referring to the statutory cap on foreman's commission, the bench observed:

“the right to interest and penalty, if any payable on any default in payment of installments set out, in Section 21(c) falls outside the purview of commission or remuneration specified in Section 21(b).”

It further held, “the interest or penalty recovered by a foreman, on account of defaulting payment of installments, 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 court accordingly set aside the rulings of the Authority for Advance Ruling and the Appellate Authority.

For Petitioner: Lakshmi Kumaran & Sridharan, Advocates

For Respondents: Government Pleader for Commercial Tax, Andhra Pradesh