In a move aimed at tightening regulatory oversight over cooperative societies, the Central Goods and Services Tax (CGST) department has submitted a detailed report to the Kerala High Court, revealing that several societies have been operating financial schemes similar to chit funds without adhering to GST norms.
The report, prepared by the Deputy Commissioner of Central GST, Central Excise, and Customs, states that cooperative societies with an annual turnover exceeding ₹20 lakh are mandatorily required to register under the GST regime, as per Section 22(1) of the CGST Act, 2017. The report further clarifies that many of these societies are engaging in financial activities that qualify as taxable services under GST.
According to the findings, Group Deposit Schemes (GDS) and Monthly Deposit Schemes (MDS) operated by these societies resemble chit funds in structure and operation. These schemes, the report says, are liable to an 18% GST, considering the services are provided for consideration. Additionally, chit fund operations—where subscribers contribute regularly and receive lump-sum payouts—are taxable at 12% GST, provided there is no claim on input tax credit for goods used in providing the service.
The GST department explains that in a chit fund, the ‘chitty gross amount’ or ‘sala’—derived by multiplying the monthly contribution by the duration of the chit—is the taxable value. These transactions, involving the pooling and redistribution of funds among subscribers, fall squarely within the definition of taxable services.
The report was submitted following a directive from the Kerala High Court, which had taken suo motu cognizance of petitions filed by depositors in the Edamulackal, Mylapra, and Kumpalampoika cooperative societies in Pathanamthitta district. The petitioners had demanded the return of their deposits after reports of large-scale fraud surfaced.
An amicus curiae appointed by the court raised concerns that numerous cooperative societies in the state are not just accepting deposits and disbursing loans at interest rates higher than those of nationalised banks, but are also operating chit funds without proper registration or tax compliance.
“While these cooperative societies are officially registered, they are conducting chit fund operations without paying GST, registration fees, or stamp duty,” the amicus curiae noted in a separate submission. “This has led to a significant revenue loss for both the central and state governments.”
The Deputy Commissioner echoed this concern, stressing that cooperative societies, when providing financial benefits or services to members for remuneration, are clearly engaging in taxable business activity.
The court is expected to take further action based on the findings, which may include directing the enforcement of GST compliance, auditing the financial practices of implicated societies, and potentially launching investigations into widespread evasion.
This development is likely to have wide-reaching implications for cooperative societies across Kerala and beyond, urging them to reassess their operations, ensure proper registration, and meet all statutory tax obligations.
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