In a significant ruling, the Kerala High Court has held that interest collected by the foreman of a chit fund on defaulting subscriptions is not subject to Goods and Services Tax (GST). The judgment was delivered in response to a writ petition filed by Kerala State Financial Enterprises Ltd (KSFE), a government-owned entity, challenging a show-cause notice issued by GST authorities. The notice demanded tax on interest collected from defaulting subscribers under the CGST/SGST Acts.

The petitioner argued that such interest does not constitute consideration for the supply of goods or services under GST law. KSFE cited the Supreme Court’s decision in Oriental Kuries Ltd. v. Lissa & Others, which established that the relationship between a chit foreman and a subscriber is contractual, creating a debtor-creditor dynamic. The petitioner contended that the interest collected on delayed payments was analogous to interest on loans, which is specifically exempt from GST under Notification No. 12/2017.

The key legal issue revolved around the jurisdiction of the GST authorities to levy tax on such interest. KSFE maintained that the interest was not a payment for any service but arose out of a debtor-creditor relationship inherent in chit fund operations. The petitioner also argued that, under Notification No. 12/2017, services related to loans, advances, or deposits, where the consideration is represented by interest, are exempt from GST.

Justice Gopinath P, delivering the judgment, upheld KSFE’s arguments and ruled that the interest collected from defaulting subscribers does not qualify as consideration for taxable services. The court emphasized that the relationship between the foreman and a subscriber is contractual, as defined in Oriental Kuries. When a subscriber defaults, the foreman is entitled to recover the lump sum of future subscriptions along with interest, which constitutes a debt and not a taxable supply.

The court further clarified that, under Notification No. 12/2017, interest on transactions involving loans, deposits, or advances is exempt from GST. Since the interest collected by the foreman in this case falls within this category, it cannot attract GST. Referring to Section 15(2)(d) of the CGST/SGST Acts, the court noted that interest is taxable only when it relates to delayed payment of consideration for a taxable supply. In this instance, as the subscription itself was not payment for any service, the interest on delayed payments could not be treated as consideration for taxable services.

This judgment underscores the principle that not all forms of income received by an entity qualify as consideration for taxable supplies under GST. The court’s ruling provides clarity on the nature of interest income in chit fund operations and its distinction from taxable services. It also reinforces the limited scope of GST applicability, particularly in cases where income arises from contractual obligations rather than from the supply of goods or services.

Consequently, the Kerala High Court quashed the show-cause notice issued to KSFE, declaring it without jurisdiction.

Cause Title: Kerala State Financial Enterprises Ltd Vs Union Of India

Case No: WP (C) No. 24620 of 2022

Citation: 2024:KER:67655

Date: September-04-2024

Bench: Justice Gopinath P

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