GST Update on taxability of penalty charged for delayed payment of subscription amount 112/2020-21

The present update seeks to discuss the recent Advance Ruling pronounced by Andhra Pradesh AAR in the case of M/s Ushabala Chits Private Ltd. Applicant is a chit fund organization conducting chit auctions for the past 36 years. They register the members and conduct auctions. The organizations are collecting subscription money from members by dividing the prize money with number of members. They are collecting commission from members i.e. 5% from the amount to be distributed to the members taking the prize money and have paid GST on the commission @ 12%. However, many a times subscribers fail to deposit subscription amount within the specified date so that the organization is borrowing money from bank and making payment to the prized subscribers. In order to maintain payment cycle and also recover interest cost which was charged by the bank, the organizations charging interest/penalty from the members paying the subscriptions belatedly and interest dependent upon the period of delay from specified date of payment to actual date of payment. The question raised by the applicant is whether the interest/penalty collected for delay is supply under GST and if yes, what is the classification and rate of tax applicable?

The applicant contended that the actionable claims are neither supply of goods nor services as per Schedule III of CGST Act, 2017 and since prize money paid to the winning subscriber is actionable claim not liable to GST, the interest/penalty charged for delayed subscription is also not liable to GST. It was also contended that interests on deposits are exempt from GST Act in terms of Sl.no.27 of the Notification No.11/2017-CT (Rate).

The AAR held that exemption from levy of GST is to interest on deposits, loans and advances whereas in the present case, the applicant is charging penalty which partakes the character of fees/charges in relation to extending deposits, loans and advances which is liable to GST as per clarification issued vide Circular no. 102/12/2019-GST.

To clarify the position, it was stated that there is difference between lottery ticket and bus ticket as a lottery ticket is actionable claim but bus ticket is not actionable claim. Purchase of a bus ticket gives the right to a person to travel by bus. It is nothing other than a contract of carriage. It clearly clarified that assignment of right of recovery of unsecured debt is actionable claim. Therefore, chit amount will not come under purview of actionable claim. The additional amount being charged for 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.

It was held that the activity is classified under SI. No 15 of Heading 9971 Financial and related services, attracting GST @12% as per Notification No. 8/2017-Integrated Tax (Rate) dated, the 28th June, 2017 as amended from time to time.

It is often observed that decisions of advance rulings are pro-revenue but in the present case, the AAR has gone one step forward and has held that the main activity of collecting chit amount is not actionable claim and so the penalty charged for delay in payment of subscription amount will be chargeable to GST @12% according to the original supply of financial and related services.

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GST Update on taxability of penalty charged for delayed payment of subscription amount 112/2020-21

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