GST (Goods and Services Tax) is a single tax levied on the supply of goods and services in India. While the contributions or payouts in chit funds are not directly taxed under GST, there are parts of the service that are.
The key area where GST comes into play is the commission or service fees charged by the chit fund company. Managing a chit fund involves administrative tasks like organizing auctions, handling the collection of funds, and ensuring payouts are smooth. For these services, the chit fund company typically charges a commission. GST on chit fund commissions is applied at the rate of 18% on this commission or fee. So, if the company charges you for managing the fund, GST is added to that fee.the Government of India has revised the applicable rates of GST on chit funds from 12% to 18%. Below, we understand the implications of the rate hike and how it adversely impacts the chit fund companies and their investors.
Applicability of GST on Chit Funds
In India, chit funds can only be created after receiving the express sanction of the respective state governments. These funds are regulated under the Chit Funds Act 1982.
This act allows the ‘foreman,’ i.e., the manager of a chit fund, to charge a maximum commission of 7% of the total chit amount received.
GST is levied on the commission paid to the foreman of a chit fund for the services rendered in relation to chit. This is because the foreman’s commission is considered a ‘supply of service’ under the remit of the GST law.
GST Rate on Chit Funds Commission and HSN Code
The applicable HSN code for chit funds is Heading 9971: Financial and related services.
Per the latest recommendation by the 47th GST Council meeting, the GST rate on chit fund commission has been raised from 12% to 18%. This is subject to the condition that no input tax claims (ITC) have been availed on the goods used for supplying chit services.
Input Tax Credit (ITC) Claims
Under Heading 9971, ‘Financial and related services,’ services provided by the foreman in relation to the chit fund business attract an 18% GST. However, this rate is applicable subject to the condition that no input tax credit has been claimed on the goods used to provide services in the chit fund business.
FAQs
Q1. Can we claim GST on chit funds?
In a chit fund business, an 18% GST is levied only on the commission charged by the foreman for operating this fund, provided no ITC claims have been availed of on the goods that were used for providing services to the chit fund. Whereas, the chit fund subscribers are liable to pay taxes under the income tax act on the amount received from the chit fund.
Q2. Is there GST on donations?
Donations and grants made for non-philanthropic purposes and which do not result in any commercial gain will not attract any GST. However, for any other donation made, a GST of 28% will be applicable.
Q3. Is TDS applicable on chit funds?
No, since a foreman’s commission does not constitute a part of the chit subscriber’s expense, the case for incidence of TDS does not arise.
