Facts of the Case:
In this case, the petitioner was a chit fund company engaged in conducting chit schemes. In certain cases, subscribers—both prized and non-prized—default in payment of monthly subscriptions. To ensure continuity of the chit scheme and timely disbursement of prize amounts, the foreman makes good the defaulted amounts from his own funds. Such amounts are subsequently recovered from defaulting subscribers along with interest and penalty, as permitted under Section 21(1)(c) of the Chit Funds Act, 1982.
The Petitioner sought clarity before AAR on the GST implications on interest and penalty collected for delayed payment of subscriptions. The AAR, by ruling dated 05.05.2020, held that interest, late fee and penalty collected on delayed payment formed part of the value of supply of services and were liable to GST at 12%. This ruling was affirmed by the Appellate Authority for Advance Ruling (AAAR) by order dated 21.09.2020.
Aggrieved by the said rulings, the petitioner filed the present writ petition, contending that such interest and penalty constitute interest on a debt, exempt from GST under Entry No. 27 of Notification No. 12/2017-CT (Rate), and cannot be treated as consideration for services rendered by the foreman.
Issue:
Whether interest and penalty collected by a chit fund foreman from defaulting subscribers constitute consideration for a taxable supply under the GST law. Whether such interest and penalty fall within the scope of exemption under Entry No. 27 of Notification No. 12/2017-CT (Rate) as interest on deposits, loans or advances.
Held That:
The Court noted that under Notification No. 11/2017-CT (Rate), services provided by a chit fund foreman in relation to chit are taxable and that foreman’s commission or remuneration under Section 21(1)(b) of the Chit Funds Act, 1982 is admittedly subject to GST. However, the dispute in the present case was confined to the interest and penalty collected on delayed payment of subscriptions. After examining Sections 21 and 22 of the Chit Funds Act, 1982, the Court held that the right to receive interest and penalty under Section 21(1)(c) is distinct from the right to receive commission or remuneration under Section 21(1)(b). The statutory cap placed on foreman’s commission makes it clear that interest and penalty cannot be subsumed within service fees for conducting the chit.
Placing reliance on the decision of the Supreme Court in Oriental Kuries Ltd. v. Lissa, the Court held that once a prized subscriber receives the chit amount, the future instalments payable by such subscriber constitute a debt, and recovery thereof—including interest on default—is in the nature of recovery of a debt. Consequently, the interest charged on delayed payment squarely answers the definition of “interest” as contained in Notification No. 12/2017-CT (Rate).
The Court further held that such interest cannot be treated as “service fee or other charges” excluded from the definition of interest under the exemption notification. Since the foreman’s service fee is separately identified and capped by statute, the interest and penalty recovered on default retain their independent character as interest on debt.
The High Court held that interest and penalty recovered by a chit fund foreman on account of default in payment of instalments are not exigible to GST. Accordingly, the Court set aside the rulings of the Authority for Advance Ruling and the Appellate Authority for Advance Ruling and held that interest and penalty recovered by a chit fund foreman for delayed payment of instalments are exempt from GST under Entry No. 27 of Notification No. 12/2017-CT (Rate). The writ petition was allowed with no order as to costs.
Case Name: M/s. Ushabala Chits Private Limited Versus The Commissioner of State Tax Andhra Pradesh, The Commissioner of Central Tax And Customs, Visakhapatnam, The Appellate Authority For Advance Ruling, Edupugallu, The Union of India, The State Of Andhra Pradesh. dated 10.12.2025
To read the complete judgement 2025 Taxo.online 3269
