DECEMBER 17, 2025

GST Loses Interest - Chit Funds Win Clarity

By Vijay Kumar

INDIA's genius for financial contraptions gave us the chit fund - a blend of thrift, theatre, and arithmetic. It is savings, lottery, and auction, all rolled into one, with a foreman presiding like a benevolent dictator who also doubles as debt collector, auctioneer, and occasional punching bag. And when the taxman tries to join the game, the rules of cricket suddenly look simpler.

This is the story of how foremen, fines, and GST collided - and why the High Court of Andhra Pradesh had to remind everyone that interest on delay is not the same as foreman's service fee. - Ushabala Chits Private Limited Versus The Commissioner - 2025-TIOL-1936-HC-AP-GST

How a chit fund actually runs (and why it works)

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. 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/-5% of Rs. 1,00,000/-) each month.

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. Each subscriber is entitled to receive a maximum prized money of Rs. 95,000 and re-pay 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, in monthly installments. The Chit Fund Act, 1982 has fixed a maximum discount at 40% of the chit value. 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".

Sometimes, 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 do not fail, the foreman makes good the said payments and hands over the prize amount to the prized subscriber. The money so made good by the foreman is recovered from the chit subscribers and interest, at the rate agreed upon, would be charged for such late payments or recovery of amounts by the foreman subsequently.

This is the scenario.

- One foreman, forty subscribers, forty months. It's like a cricket league, except instead of sixes and wickets, you get monthly auctions and dividends.

- The foreman's role is central. He is the impresario. He gathers the crowd, collects the money, runs the auctions, disburses prizes, and keeps the show from collapsing. For this, he pockets a 5% commission. Think of him as the IPL commissioner, but with less glamour and more spreadsheets.

- The math is simple but dramatic. Rs 2,500 × 40 = Rs 1,00,000. Foreman takes Rs 5,000. The maximum prize per subscriber is Rs 95,000.

- The auction drama begins. Subscribers bid discounts to get the prize earlier. The law caps discounts at 40%. The difference between Rs 95,000 and the actual prize becomes chit dividend, shared among all. It's socialism with a dash of capitalism – and a pinch of impatience.

- The safety valve: When someone defaults, the foreman steps in, pays up, and later recovers with interest. He is part banker, part debt collector.

This ecosystem thrives on trust, discipline, and the occasional default.

And defaults are where the taxman smelled opportunity.

The important question was whether GST is payable on such interest/penalty for delay in payment of subscription.

Our GST Assessee approached the Authority for Advance Ruling (AAR) which by a Ruling, dated 05.05.2020, held that the additional amount being charged on delayed payment - 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.

Aggrieved, the assessee approached the Appellate Authority for Advance Ruling (AAAR), which by its Ruling dated 21.09.2020, affirmed the Order of the AAR.

The GST question was deceptively simple:

- If a subscriber delays payment and pays interest/penalty, is that part of the foreman's service consideration (and hence taxable)?

- Or is it simply interest on debt (and hence not taxable)?

The Authority for Advance Ruling (AAR) echoed: “Tax it."

The Appellate Authority (AAAR) amplified: “Yes, tax it."

The petitioner resisted: “Wait, this is debt interest, not service fee.

And finally, the High Court clarified: “Interest is not service."

Aggrieved by the Advance Ruling orders, the assessee approached the High Court of Andhra Pradesh in Writ Petition with the submissions that:

1. the amount payable by the defaulting subscribers would have to be treated as a debt and interest payable on such debt would not attract levy of GST.

2. the consideration for service offered by the foreman, for conducting the chit, is paid separately to the foreman and the interest payable on the delayed payment of chit subscription amounts cannot be treated to be part of the consideration paid to the foreman for his services and running the chit.

The Authority for Advance Ruling had framed two questions: -

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?

The Authority held that the additional amount being charged on delayed payment termed as interest, late fee or penalty on the amount delayed in specified time cannot be bifurcated and as such additional payment does not have its own classification. It takes colour, from the original supply, that is supply of financial & related services.

Two government notifications, both dated 28.06.2017, created two parallel universes:

- Notification No. 11/2017 (Rate): Entry 15 - Services by a foreman of a chit fund are taxable. No dispute. Foreman's 5% commission is GSTable.

- Notification No. 12/2017 (Exemption): Entry 27 - Services by way of extending deposits, loans, or advances, insofar as consideration is interest or discount, are exempt.

So, the hinge was: Is delay interest foreman's service fee or interest on debt?

Under the Notification No. 11 of 2017, dated 28.06.2017, the consideration paid for services provided by a foreman of a chit fund, in relation to chit, is exigible to tax.

The entry Sl. No. 15 reads as: -

(i) Services provided by a foreman of a chit fund in relation to chit.

Notification No. 12 of 2017, dated 28.06.2017, was issued by the Central Government, setting out the services on which are exempted from payment of GST. Entry No. 27 to this Notification reads as: -

"Services by way of-

(a) extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount (other than interest involved in credit card services);

The petitioner contended that the payment of interest and penalty, on delayed payment of installments, even if termed to be consideration for a service given by the foreman, would still be exempt from payment of GST on account of the exemption granted under the Notification No. 12 of 2017.

The High Court found that:

- There is no dispute that the petitioner is liable to pay GST on the remuneration or commission paid to the foreman under Section 21(b) of the Act, 1982.

- Interest or the penalty recovered by a foreman, from a defaulting chit subscriber would clearly fall under Entry No. 27 of the notification No. 12 of 2017.

The High Court held that 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.

The findings of the Authority for Advance Ruling, dated 05.05.2020 and the Appellate Authority for Advance Ruling, dated 21.09.2020 were set aside as it was held that 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.

When the High Court finally stepped in, its reasoning was crisp:

- Foreman's commission: Taxable. It is consideration for service “in relation to chit."

- Delay interest/penalty: Not taxable. It is interest on debt, exempt under Notification No. 12/2017.

The Advance Rulings set aside, the foreman could breathe again. Adding GST on delay interest would make him a tax martyr. He would need a GST consultant just to file returns on fines - soon the penalty for delay would be delayed GST returns themselves.

The subscriber's relief

Subscribers, too, benefit from the judgment. Imagine paying Rs 100 as late fee and then Rs 18 as GST on that fee. That's punishment with GST garnish.

Chit funds are metaphors for Indian life:

- The auction : Symbolizes ambition. Everyone wants the prize early, but at a cost.

- The dividend : Symbolizes socialism. Everyone shares the benefit of someone else's impatience.

- The foreman : Symbolizes authority. He keeps the system running, even when defaults occur.

- The default : Symbolizes human frailty. Someone always forgets, delays, or struggles.

- The interest : Symbolizes discipline. Delay has a price.

GST tried to intrude into this metaphor, but the Court restored balance.

Don't make delay interest do foreman's job. Commission is service, interest is debt.

In the theatre of GST, the foreman remains the impresario. His commission is service; his discipline is debt. And thanks to the High Court, his role is intact - not every rupee is consideration, not every fine is service."