Interest, Penalty Recovered by Chit Foreman Not Exigible To GST: AP HC

The Andhra Pradesh High Court has held that the interest and penalty recovered by chit foreman is not exigible to Goods and Service Tax (GST). The bench of Justice R. Raghunandan Rao and Justice T.C.D.Sekhar has quashed AAR and AAAR orders and observed that 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. Such interest or penalty recovered by a foreman, from a defaulting chit subscriber would clearly fall under Entry No. 27 of Notification No. 12 of 2017. The petitioner/assessee, a registered chit fund company governed by the Chit Funds Act, 1982 and the AP Chit Funds Rules, 2008, regularly collects monthly installments from subscribers and pays out prize amounts through auctions or draws. Under the statute, chit foremen are responsible for ensuring timely disbursement of prize money—even if some subscribers default. To protect the integrity of the chit system, foremen often make good the missing amounts when subscribers default and later recover the dues along with interest or penalty as allowed under Section 21(c) of the Act. Seeking clarity on whether such interest is taxable under GST, the petitioner approached the AAR. However, the AAR ruled in May 2020 that the interest/penalty collected from defaulting members formed part of the value of supply and was therefore taxable. This decision was affirmed by the Appellate AAR in September 2020. Challenging these rulings, the chit company moved the High Court. The petitioner argued that interest collected on delayed installment payments is not consideration for services, but compensation for debt—covered under Entry 27 of Notification 12/2017, which exempts interest on loans, deposits, or advances from GST. The foreman’s actual taxable service is only the commission earned under Section 21(b). Interest collected from defaulters cannot be clubbed with foreman’s remuneration.AAR and Appellate AAR had earlier held that any additional amount collected from subscribers on delayed payments should be treated as part of the value of the original supply (chit service). Since foremen are statutorily entitled to such interest, it forms part of their taxable consideration.The court held that under Section 21(c) of the Chit Funds Act, foremen are entitled to interest and penalties on delayed installments. However, Section 21(b) caps foreman’s service fee at 7% of the chit value. This means interest/penalty cannot be treated as service fee, as it would exceed the statutory cap. The Bench relied on the Supreme Court’s decision in Oriental Kuries Ltd. vs. Lissa, which categorised the amount received by a prized subscriber as a loan, and defaulted installments as recoverable debt. Thus, interest charged on such delayed payments is in the nature of interest on debt, not service consideration. The court held that Entry 27 of Notification 12/2017 exempts services involving extending loans, deposits, or advances, when the consideration is interest. The court held that interest collected from defaulting subscribers clearly falls within this exemption. It cannot be categorised as a “service fee” or other charge. The High Court set aside AAR ruling and Appellate AAR ruling and declared that Interest and penalty recovered by chit foremen from defaulting subscribers are not liable to GST. The writ petition was accordingly allowed, with no order as to costs. Case Details Case Title: M/S. Ushabala Chits Private Limited Versus The Commissioner Of State Tax Case No.: Writ Petition No.14745 Of 2021 Date: 10-12-2025 Counsel For Petitioner: Lakshmi Kumaran Sridharan Counsel For Respondent: GP Click Here To Read Order Read More: IGST Liability Depends on Destination of Goods, Not Origin; Says Transfer of Title Has No Nexus with Tax U/s 10(1)(a): Karnataka HC

Interest, Penalty Recovered by Chit Foreman Not Exigible To GST: AP HC

Membership Required

Latest articles

HPCL Certificate Valid Proof of Duty-Paid Bunkers, Demand on 49.431 MT Diesel Quashed: CESTAT

No Basis to Doubt Loan Once Identity, Creditworthiness & Genuineness Established: ITAT Upholds Deletion of Rs. 2 Cr Addition

Dept. Can’t Travel Beyond SCN: CESTAT Allows Refund of CENVAT Credit Reversed Due to Audit Objection

No Material Collected During Search or Post-Search Enquiries, Revealing Any Actual Commission Income from Alleged Accommodation Entries: ITAT

More like this

HPCL Certificate Valid Proof of Duty-Paid Bunkers, Demand on 49.431 MT Diesel Quashed: CESTAT

No Basis to Doubt Loan Once Identity, Creditworthiness & Genuineness Established: ITAT Upholds Deletion of Rs. 2 Cr Addition

Dept. Can’t Travel Beyond SCN: CESTAT Allows Refund of CENVAT Credit Reversed Due to Audit Objection

About us

Company

Categories