Chit funds choked by GST levy

Goods and Services Tax (GST) on chit funds has crushed this traditional financial instrument, its defenders say.

The levy of GST has rendered the chit model cost inefficient and neither the subscribers nor the chit promoters can afford the tax burden, said TS Sivaramakrishnan, General Secretary, All India Association of Chit Funds (AIACF).

By bringing chit funds under the ambit of GST, it depicts the step-motherly treatment meted out to the industry that has been singled out for taxing while other NBFCs enjoys 90-100 per cent abatement, he said.

Sivaramakrishnan further said: “The chit industry has been pleading to increase the abatement from 30 per cent to 90 or 100 per cent, to make it at par with other NBFCs. The implementation of GST has further dented our prospects as we now end up paying more than the service tax levy.

“To explain, we were being charged at an effective rate of 10.5 per cent (15 per cent less abatement of 30 per cent) in the service tax regime but in the GST it has been increased to 12 per cent,” he added.

The recent trends in the industry have led to concerns about limiting the reach of chit funds to poorer households.

According to Sivaramakrishnan, “Chit fund regulations have significantly increased the transaction costs for chits, and since most of the costs have to be incurred for each additional member, the regulations could push funds away from serving the poor.

“As funds can only justify the transaction costs per capita if the individual ticket size is relatively large, this possibility cannot be ruled out.”

The functionality of the chit funds is akin to that of banks and NBFCs, which mobilise savings from account-holders and lend them to borrowers.

With the introduction of Section 269 ST in the Income Tax Act, cash receipts exceeding ₹2 lakh are not permitted, and non-compliance of the same would trigger penal provisions and penalty equivalent to the amount of cash receipt can be levied.

Government-run banks, post office savings bank, and co-operative banks have been exempted from the Section, with power accorded to the Centre to further exempt persons or class of persons or receipts.

“This exemption has now been rightly extended to NBFCs and HFCs (housing finance companies) as well as it would have adversely affected their collections, thus increasing their NPAs (non-performing assets).

“While we welcome this amendment, which would discourage transactions in black money as it seeks to penalise the receiver, such a penal provision would be harsh on an industry such as ours, which, in fact, has been playing a greater role in mobilising small cash pockets into the larger financial system by bringing them into the banking channels, which is exactly what is sought to be achieved by Section 269 ST,” said Sivaramakrishnan.

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