Chit fund late payment charges taxable under GST

The interest/penalty collected for delay in payment of monthly subscription by members of a chit fund constitutes a taxable supply under GST. The appellate authority classified this service under HSN Heading 9971, subject to GST at 12%. The interest/penalty is not exempt from GST as it is considered part of the service provided by the chit fund foreman. The authority emphasized the importance of collecting delayed instalments and interest to ensure the chit fund's proper functioning. The ruling modified the decision of the Authority for Advance Ruling, confirming the taxability of such collections.

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Issues Involved:
1. Whether the interest/penalty collected for delay in payment of monthly subscription by the members forms a supply under GST.
2. If the said interest/penalty is a supply, what is the classification and rate of duty applicable on the said supply.
3. Whether the interest/penalty collected for delay in payment of subscription amount is exempt from GST.

Issue-wise Detailed Analysis:

1. Whether the interest/penalty collected for delay in payment of monthly subscription by the members forms a supply under GST:
The appellant, a company engaged in conducting chit auctions, collects interest/penalty from defaulting subscribers. The appellant argued that such interest/penalty should not be treated as a supply under GST. However, the Authority for Advance Ruling (AAR) concluded that the interest/penalty collected for delay in payment of monthly subscription by the members is a supply under GST.

2. If the said interest/penalty is a supply, what is the classification and rate of duty applicable on the said supply:
The AAR classified the interest/penalty under Sl. No 15 of Heading 9971 Financial and related services, subject to GST at 12% as per Notification No 8/2017-Integrated Tax (Rate) dated 28th June 2017. The appellate authority upheld this classification, confirming that the collection of delayed/defaulted instalments and interest thereon by the foreman is a supply of service in relation to the chit and falls under HSN classification of Heading 9971.

3. Whether the interest/penalty collected for delay in payment of subscription amount is exempt from GST:
The appellant contended that the interest/penalty is exempt from GST under Notification No.12/2017-CT(Rate) dated 28.06.2017, which exempts services by way of extending deposits, loans, or advances where the consideration is represented by way of interest or discount. However, the appellate authority found this argument misplaced, stating that the chit fund business does not involve extending deposits, loans, or advances. The authority clarified that the interest collected from defaulting subscribers is different from interest against loans or advances by financial institutions and is not exempt from GST. The interest collected is considered part of the service provided by the foreman in relation to the chit and is thus taxable.

Discussion and Findings:
The appellate authority reviewed the entire records, facts of the case, and submissions made by the appellant. It was determined that the collection of delayed instalments and interest thereon by the foreman is a service rendered in relation to a chit. The authority emphasized that the foreman’s duty to collect instalments and penal interest is essential for the functioning of the chit fund, as it ensures the payment of the prize amount to the prized subscriber. This service is classified under HSN Heading 9971 and is subject to GST.

Order:
1. The collection of delayed instalments along with interest/penalty from the members of a chit constitutes the taxable supply of the services provided by a foreman of a chit fund in relation to chit.
2. The services provided by a foreman of a chit fund in relation to chit are classified under HSN Heading 9971 under Notification No. 11/2017-Central Tax (Rate) dated 28-6-2017 / Notification No. 8/2017-Integrated Tax (Rate) dated 28-6-2017 as amended from time to time. The rate of tax would be as applicable under the said heading 9971, depending on the nature of supply, i.e., intra-state or interstate.
3. The ruling of the Authority for Advance Ruling vide their order No. AAR No.13/AP/GST/2020 dated 05.05.2020 stands modified accordingly.

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