The Andhra Pradesh Authority of Advance Ruling (AAR) ruled that 12% of GST is applicable on interest/penalty collected for the delay in payment of monthly subscription by the members of the chit fund company.
The applicant, M/s. Ushabala Chits Private Limited 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 auctions 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 at the rate of 5% from the amount to be distributed to the member taking the prize money.
The GST is paid on the foreman commission at the rate of 12%. The foreman is responsible for registering the members, collection of money from the members, the conduct of auctions, and other related matters.
Many a time, 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 applicant has sought advance ruling on the issue whether the interest/penalty collected for the delay in payment of monthly subscription by the members forms a supply under GST and if the said interest/ penalty is a supply, what is the classification and rate of duty applicable on the said supply.
The Authority consisting of members D. Ramesh and M. Shreekanth ruled that 12% of GST is applicable on interest/penalty collected for the delay in payment of monthly subscription by the members.
“The additional amount being charged in the delay of payment by whatever name called should be classified as principal supply and the classification of the same cannot differ from the original supply. Hence the additional amount charged on delayed payment shall be taxed as per original supply i.e. supply of financial and related services,” the AAR observed.
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