12% GST on Interest or Penalty Charged by Chit Fund Company

Case Covered:

M/s. Ushabala Chits Private Limited

Facts of the Case:

The applicant is a company, engaged in conducting chit auctions for the past 36 years and is one of the longest-standing organizations. They register the members and conduct auction in respect of each chit each month. The member winning the auction will collect the prize money from the company)’. The company’ will be collecting subscriptions from members by dividing the prize money, with the number of members. The applicant is collecting the foreman commission @ 5% from the amount to be distributed to the member taking the prize money. The GST is paid on the foreman commission @ 12%. The foreman is responsible for registering the members, collection of money from the members, the conduct of auctions, and other related matters.

The applicant is responsible to pay the prize money). by the due date to the winner of the auction. Therefore, collection of amount from members is mandatory for payment of prize money)’ to the winner by the due date. However, many times, the subscribers fail to deposit subscriptions by the specified date. In such a scenario, the applicant is borrowing the money from banks by payment of interest and making payment to the prized subscribers. In order to maintain discipline in payment and also to cover the interest cost, the applicant charges interest/penalty by whatever name called, from the members paying the subscriptions belatedly, and the interest is dependent upon the period of delay from a specified date to the actual date of payment. The interest /penalty has no element of services except that it is in an auction in money inasmuch as it is collected as a part of a subscription for the delay.

The applicant had filed an application in form GST ARA-01, dt.06.01.2020, paying the prescribed amount of fee for seeking Advance Ruling.

Observations:

In the instant case, having regard to the nature of transaction it cannot be said that the chit company has extended any deposit, loans or advances to its customers hence the additional amount being charged cannot be treated as interest hence the exemption granted under entry no 27 of notification no 12/2017 is not applicable on the transaction on which advance ruling is sought.

It is further clarified in circular No. 102/21/2019-GST dated 28th June 2019 that “any service fee/charge or any other charges that are levied by M/s. ABC Ltd in respect of the transaction relating to extending deposits, loans or advances does not qualify to be interest as defined in notification 12/2017-Central Tax (Rate) dated 28th June 2017, and accordingly will not be exempt” 

Ruling:

Query: Whether the interest/penalty collected for the delay in payment of monthly subscription by the members forms a supply under GST?

Answer: Affirmative.

Query: If the said interest/penalty is a supply, what is the classification and rate of duty applicable to the said supply?

Answer: It is classified under Sl. No 15 of Heading 9971 Financial and related services, GST @ 12% as per Notification No. 8/2017-Integrated Tax (Rate) dated, the 28th June 2017 as amended from time to time.

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