Interest and penalties for delayed subscription payments in chit funds are not subject to GST, as they do not qualify as service fees under the Chit Fund Act and associated rules.

ORDER :

R. Raghunandan Rao, J.

The petitioner is a chit fund company engaged in the business of running chit schemes. The conduct of chits is regulated by the Chit Fund Act, 1982 [for short “the Act 1982”] read with the Andhra Pradesh Chit Funds Rules, 2008 [for short “the Rules 2008”]. The method of conduct of chits, as regulated by the said Act, 1982 and the Rules, 2008, has been set out by the petitioner in the affidavit filed in support of the Writ Petition. The same is being extracted below:-

“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. In the above example, the Foreman would be able to commence a chit value of Rs.1,00,000/- (Rs 2.500 X 40 subscribers) for 40 months and collect foreman commission of Rs 5,000/-15% of Rs.1,00,000/-) each month.

Continuing the example, 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 prized 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 installments, normally there would be several subscribers willing to receive at a discount i.e., less than Rs.95,000/- and re-pay the prized money so received, in monthly installments. The Chit Fund Act, 1982 has fixed a maximum discount at 40% of the chit value (Section 6 of the Chit Fund Act, 1982 read with Rule 13 of the AP Chit Fund Rules, 2008). The difference between the maximum amount payable by the Foreman after Foreman's commission i.e., Rs.95,000/- (Rs.1,00,000-5,000/-) and the actual prized money receivable by a subscriber, is divided equally amongst all the chit subscribers of the particular chit group and it is called “chit dividend".

2. In certain instances, both the non-prized subscriber as well as the prized subscriber, fail to pay the necessary chit installments. In such a situation, to ensure that the chit schemes does not fail, the foreman makes good the said payments and hands over the prize amount to the prized subscriber, who is entitled to the said prized amount. The money so made good by the foreman is recovered from the 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.

3. The petitioner, with a view to have 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 by a Ruling, dated 05.05.2020, in Ruling No.13/AP/GST/2020, 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 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 Advance Ruling. The Appellate Authority by its Ruling, in Order bearing AAAR/AP/03(GST)/2020, dated 21.09.2020, affirmed the Order of the Authority for Advance Ruling. Aggrieved by the said Authority for Advance Ruling and the Appellate Authority for Advance Ruling, the petitioner has approached this Court by way of the present Writ Petition.

4. Sri Ragh