The Andhra Pradesh High Court has held that the interest and penalty, recovered by a foreman, in relation to default in payment of installments by the chit fund subscribers would not be exigible to tax under the GST provisions. The assessee was represented by Lakshmikumaran & Sridharan Attorneys here.
Observing that Section 21(b) of the Chit Fund Act, 1982 places a cap on the service fees that can be collected by a foreman to 7% of the gross chit amount, the Court was of the view that the right to interest and penalty in Section 21(c) falls outside the purview of commission or remuneration specified in Section 21(b). Further, according to the Court, the cap of 7% set out in Section 21(b) would be a bar to the foreman to recover interest and penalty under Section 21(c).
Accordingly, it was held that 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 Notification No. 12/2017-CT(R).
Allowing the writ petition, the High Court in Ushabala Chits Private Limited v. Commissioner also opined that interest or penalty recovered by a foreman from a defaulting chit subscriber would fall under Entry No.27 of Notification No. 12/2017-Central Tax (Rate) and thus be exempt from GST.
The High Court for this purpose relied upon a Supreme Court decision in Oriental Kuries Limited v. Lissa & Ors. [(2019) 19 SCC 732] which had held that the relationship between a chit subscriber and the chit foreman is a contractual obligation, which creates a debt on the day of subscription, and on default taking place, the foreman is entitled to recover the consolidated amount of future subscriptions from the defaulting subscriber in a lump sum.