In a significant ruling, the High Court of Kerala held that Goods and Service Tax is not ( GST ) leviable on interest from Chit Fund Defaults and set aside the demand order against Kerala State Financial Enterprises Ltd ( KSFE ).
The petitioner is a company engaged in the business of conducting chits. The petitioner challenged the show cause notice which calling upon the petitioner to show cause as to why Goods and Services Tax ( GST ) amounting to Rs.61,55,21,173/- (Rupees Sixty-one Crores Fifty-five Lakhs Twenty-one Thousand one Hundred Seventy-three only) should not be demanded and recovered under the provisions of Section 74 of the Central Goods and Services Tax/State Goods and Services Tax Acts, 2017, ( CGST/SGST Acts ), as to why interest should not be demanded on the aforesaid sum and as to why penalty should not be imposed in terms of the provisions contained in the CGST/SGST Acts for violation of the provisions of the law.
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It was stated that the show cause notice is clearly without jurisdiction and is liable to be quashed in the exercise of the jurisdiction vested in this Court under Article 226 of the Constitution of India. Further challenge notification which relates to the rate of GST for commission received in terms of the provisions contained in Section 21(1)(b) of the Chit Funds Act, 1982 ( ‘1982 Act’). It is submitted that the said challenge also need not be considered now and can be left open for consideration.
Sri. V Raghuraman, the Counsel appeared for the petitioner submitted that the show cause notice has been issued on the sole basis that interest received/interest collected by the petitioner from defaulting subscribers to a chit should also be the subject matter of a charge of GST under the CGST/SGST Acts. It is submitted that the provisions of the 1982 Act which permits a company engaged in the business of conducting chits to collect interest were the subject matter of the decision of the Supreme Court in Oriental Kuries Limited. v. Lissa and Others; (2019).
In the said case, it was held that the relationship between a chit subscriber and a chit foreman is a contractual obligation which creates a debt on the day of subscription. On default taking place, the foreman is entitled to recover the consolidated amount of future subscriptions from the defaulting subscriber in a lump sum.
Sri. Sreelal N. Warrier, the Counsel appeared for the respondent Department vehemently opposed the grant of any relief to the petitioner. It was contended that the question as to whether the transactions which are the subject matter of show cause notice are transactions for which there could be a levy of GST is a matter that should be left for the consideration of the statutory authorities.
A single bench of Justice Gopinath P viewed that a reading of sub-sections 21(1)(b) and (c) of the 1982 Act indicates that the foreman of a chit is entitled to an amount not exceeding 7% of the chit amount as may be fixed in the chit agreement, by way of commission, remuneration or for meeting the expenses of running the chit. He is also entitled, under the provisions of Section 21(1)(c) of the 1982 Act, to interest and penalty, if any, payable on any default in the payment of instalments and to such other amounts as may be payable to him under the provisions of the chit agreement.
Complete Supreme Court Judgment on GST from 2017 to 2024 with Free E-Book Access, Click here
It was observed that the relationship between a chit subscriber and the chit foreman is a contractual obligation, which creates a debt on the day of subscription. On default taking place, the foreman is entitled to recover the consolidated amount of future subscriptions from the defaulting subscriber in a lump sum.
The bench viewed that show cause notice is confined to the interest received from the defaulting subscribers. In such circumstances, for reasons indicated, it must be held that the amount of interest received by the foreman of a chit on defaulting subscriptions cannot be said to be amounts received as consideration for the supply of services.
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