the essay of 17 December 2025 · the untouched capture
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<!DOCTYPE HTML PUBLIC "-//W3C//DTD HTML 4.01 Transitional//EN" "http://www.w3.org/TR/html4/loose.dtd"> <html> <head> <title>Untitled Document</title> <meta http-equiv="Content-Type" content="text/html; charset=utf-8"> </head> <body bgcolor="#FFFFFF"> <p align="justify"><strong><font color="#663399"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif">DECEMBER 17, 2025 </font></font></font></strong></p> <p align="center"><font color="#FF6633" face="Verdana, Arial, Helvetica, sans-serif" size="2"><strong> GST Loses Interest - Chit Funds Win Clarity</strong></font></p> <p align="center"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif"><strong><u>By Vijay Kumar</u></strong></font></font></p> <p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif"><strong>INDIA's</strong> 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. </font></font></p> <p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif">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. - <em>Ushabala Chits Private Limited Versus The Commissioner - </em><a href="https://taxindiaonline.com/searchcaselaw/details?id=190615&type=caselaw&keyword=null" target="_blank"><em><strong>2025-TIOL-1936-HC-AP-GST</strong></em></a></font></font></p> <p align="justify"><font color="#006600"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif">How a chit fund actually runs (and why it works) </font></font></font></p> <p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif"><em>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. </em></font></font></p> <p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif"><em>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". </em></font></font></p> <p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif">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. </font></font></p> <p align="justify"><font color="#006600"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif">This is the scenario.</font></font></font></p> <blockquote><p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif">- One foreman, forty subscribers, forty months. It's like a cricket league, except instead of sixes and wickets, you get monthly auctions and dividends. </font></font></p><p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif">- 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. </font></font></p></blockquote> <div><blockquote><p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif">- 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. </font></font></p><p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif">- 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. </font></font></p><p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif">- The safety valve: When someone defaults, the foreman steps in, pays up, and later recovers with interest. He is part banker, part debt collector. </font></font></p></blockquote></div> <p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif">This ecosystem thrives on trust, discipline, and the occasional default. </font></font></p> <p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif">And defaults are where the taxman smelled opportunity. </font></font></p> <p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif">The important question was whether GST is payable on such interest/penalty for delay in payment of subscription. </font></font></p> <p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif">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. </font></font></p> <p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif">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. </font></font></p> <p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif">The GST question was deceptively simple: </font></font></p> <div><blockquote><p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif">- If a subscriber delays payment and pays interest/penalty, is that part of the foreman's service consideration (and hence taxable)? </font></font></p><p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif">- Or is it simply interest on debt (and hence not taxable)? </font></font></p></blockquote></div> <p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif">The Authority for Advance Ruling (AAR) echoed: “Tax it." </font></font></p> <p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif">The Appellate Authority (AAAR) amplified: “Yes, tax it." </font></font></p> <p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif">The petitioner resisted: “Wait, this is debt interest, not service fee. </font></font></p> <p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif">And finally, the High Court clarified: “Interest is not service." </font></font></p> <p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif">Aggrieved by the Advance Ruling orders, the assessee approached the High Court of Andhra Pradesh in Writ Petition with the submissions that:</font></font></p> <blockquote><p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif">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.</font></font></p><p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif">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. </font></font></p></blockquote> <p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif">The Authority for Advance Ruling had framed two questions: - </font></font></p> <div><blockquote><p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif">1. Whether the interest/penalty collected for delay in payment of monthly subscription by the members forms a supply under GST? </font></font></p><p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif">2. If the said interest/penalty is a supply, what is the classification and rate of duty applicable on the said supply? </font></font></p></blockquote></div> <p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif">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. </font></font></p> <p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif">Two government notifications, both dated 28.06.2017, created two parallel universes: </font></font></p> <div><blockquote><p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif">- 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. </font></font></p><p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif">- 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. </font></font></p></blockquote></div> <p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif">So, the hinge was: Is delay interest foreman's service fee or interest on debt? </font></font></p> <p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif">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. </font></font></p> <p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif">The entry Sl. No. 15 reads as: - </font></font></p> <blockquote><p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif"><em>(i) Services provided by a foreman of a chit fund in relation to chit. </em></font></font></p></blockquote> <p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif">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: - </font></font></p> <blockquote><p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif"><em>"Services by way of- </em></font></font></p><blockquote><p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif"><em>(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); </em></font></font></p></blockquote></blockquote> <p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif">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. </font></font></p> <p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif">The High Court found that: </font></font></p> <blockquote><p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif">- 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. </font></font></p><p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif">- 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. </font></font></p></blockquote> <p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif">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.</font></font></p> <p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif">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. </font></font></p> <p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif">When the High Court finally stepped in, its reasoning was crisp: </font></font></p> <div><blockquote><p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif">- Foreman's commission: Taxable. It is consideration for service “in relation to chit." </font></font></p><p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif">- Delay interest/penalty: Not taxable. It is interest on debt, exempt under Notification No. 12/2017. </font></font></p></blockquote></div> <p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif">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. </font></font></p> <p align="justify"><img src="https://admin.taxindiaonline.com/UploadedFiles/Customs/CaseLaws/2025/je161225.JPG" style="height:585px; width:445px"/></p> <p align="justify"><font color="#006600"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif">The subscriber's relief </font></font></font></p> <p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif">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. </font></font></p> <p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif">Chit funds are metaphors for Indian life: </font></font></p> <div><blockquote><p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif">- The auction : Symbolizes ambition. Everyone wants the prize early, but at a cost. </font></font></p><p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif">- The dividend : Symbolizes socialism. Everyone shares the benefit of someone else's impatience. </font></font></p><p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif">- The foreman : Symbolizes authority. He keeps the system running, even when defaults occur. </font></font></p><p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif">- The default : Symbolizes human frailty. Someone always forgets, delays, or struggles. </font></font></p><p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif">- The interest : Symbolizes discipline. Delay has a price. </font></font></p></blockquote></div> <p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif">GST tried to intrude into this metaphor, but the Court restored balance. </font></font></p> <p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif"><em>Don't make delay interest do foreman's job. Commission is service, interest is debt. </em></font></font></p> <p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif">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."</font></font></p> <p align="justify"><font color="#ff0000"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif"><strong>Until next week</strong></font></font></font></p> <p align="justify"><font size="2"><font face="Verdana, Arial, Helvetica, sans-serif">Comments/feedback welcome at <a href="mailto:vijaywrite@tiol.in">vijaywrite@tiol.in </a> or 9848111243 (WhatsApp)</font></font></p> </body> </html>