Ushabala Chits Private Limited Vs Commissionner of State Tax (Andhra Pradesh High Court)
The petitioner, a chit fund company, challenged rulings passed by the Authority for Advance Ruling and the Appellate Authority for Advance Ruling which held that interest, late fee, or penalty collected from defaulting chit subscribers for delayed payment of installments formed part of the value of taxable services and was liable to GST at 12%. The petitioner conducts chit schemes regulated by the Chit Funds Act, 1982 and the Andhra Pradesh Chit Funds Rules, 2008. Under the chit mechanism, subscribers pay monthly installments, the foreman conducts auctions and disburses the prize amount, and earns a capped commission for running the chit. In cases where subscribers default in payment, the foreman makes good the shortfall to ensure continuity of the chit and later recovers the amount from defaulting subscribers along with interest or penalty as provided under the statute and the chit agreement.
Seeking clarity on GST liability, the petitioner approached the advance ruling authorities, which concluded that interest or penalty on delayed payments took the colour of the original supply of services by the foreman and was therefore taxable. The appellate authority further reasoned that since the foreman’s right to collect interest and penalty arises under Section 21(c) of the Chit Funds Act, such amounts constituted consideration for services rendered in relation to the chit and were not eligible for exemption under Entry 27 of Notification No.12/2017, which exempts interest on deposits, loans, or advances.
