In the writ petition filed by Delhi Chit Fund Association, Hon’ble Delhi High Court while deciding the case of Delhi Chit Fund Association vs. UOI on 23-4-2013, (W.P. (C) 4512/2012) has quashed Entry against Sr. no. 8 of Notification 26/2012-ST which sought to levy service tax on chit-fund business, and held that the act of a foreman, who conducts auction of chit amount among contributors, does not fall under the definition of “service” provided in the Finance Act, 1994.
Earlier Service Tax on Chit Funds was clarified vide a Circular No. 96/7/2007-ST, dated, 23.08. 2007, wherein the Board covered the chit fund business under the service category of “banking and other financial services”. This Circular was quashed by the AP High Court in M/s MARGADARSI CHIT FUND (P) LTD, HYD Vs UNION OF INDIA, NEW DELHI & 3 OTHERS, M/s KAPIL CHIT FUNDS (P) LTD, KUKATPALLY, HYD & 12 OTHERS Vs UNION OF INDIA, MIN OF FINANCE NEW DELHI & 3 OTHERS and THE A P FEDERATION OF CHIT FUNDS, SEC'BAD Vs UNION OF INDIA, MIN. OF FINANCE, N DELHI & 3 OTHERS {Writ Petition No 27706 of 2006, 6028 and 6114 of 2008}. Revenue has taken this matter to the Supreme Court where it is still pending.
Presently, as per the new provisions, the Education Guide on Service Tax, dated 20-6-12, Para 2.8.2 provides that the consideration received for chit fund services are chargeable to service tax. The same is reproduced hereunder:
2.8.2 Would a business chit fund come under ‘transaction only in money'?
In business chit fund since certain commission received from members is retained by the promoters as consideration for providing services in relation to the chit fund it is not a transaction only in money. The consideration received for such services is therefore chargeable to service tax.
Further, entry no. 8 of the Notification 26/2012 provides 30% abatement on the services provided in relation to chit, meaning thereby that the said activities are taxable under service tax.
But, the Delhi High Court while disposing of the Writ Petitions filed by Delhi Chit Fund Association, has held that – In a chit business, the subscription is tendered in any one of the forms of ‘money' as defined in section 65B(33). It would, therefore, be a transaction in money. So the transaction would fall within the exclusion part of the definition of ‘service' as being merely a transaction in money (i.e. M of IMAGE concept).
Further, even if explanation 2 to the definition is considered which provides that “transaction in money shall not include any activity relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination to another form, currency or denomination for which a separate consideration is charged “then also the services rendered by the foreman of the chit business for which a separate consideration is charged, will not be considered as an activity of the nature explained in the said Explanation, hence would be out of the ambit of service tax.
