In a significant development aimed at tightening Goods and Services Tax (GST) compliance, a report by the Deputy Commissioner of Central GST, Central Excise, and Customs has confirmed that cooperative societies with an annual turnover exceeding Rs 20 lakh are liable to register under GST. The report is based on the provisions outlined in Section 22(1) of the CGST Act, 2017, and was submitted to the Kerala High Court.
Group Deposit Schemes Treated as Chit Funds, Attract 18% GST
The report highlights that group deposit schemes (GDS) and monthly deposit schemes (MDS), commonly operated by cooperative societies, are functionally similar to chit funds. These schemes, which involve periodic payments by subscribers in exchange for future benefits, are classified as taxable financial services. Consequently, they attract GST at the rate of 18%.
In contrast, traditional chit fund services fall under a different category. These are taxable at 12% GST, provided that the chit fund operator does not avail input tax credit on goods used for supplying the service.
What Constitutes a Chit Fund Under GST?
According to the GST department, a chit fund involves a group of individuals who agree to contribute a fixed amount over a specific period. The total sum collected, also referred to as the ‘sala’ or ‘chitty gross amount’, is calculated by multiplying the monthly contribution by the number of months in the scheme. The fund is then distributed periodically among members, often via an auction or draw system.
This transactional model is recognized under the Chit Funds Act, 1982, and is considered a taxable service under the GST framework when conducted for a consideration or remuneration.
Kerala High Court Steps In Amid Allegations of Fraud
The Kerala High Court had previously intervened suo motu following petitions from depositors of the Edamulackal, Mylapra, and Kumpalampoika cooperative societies in Pathanamthitta. The petitioners sought refunds of their deposits after reports of financial irregularities surfaced in these societies.
The High Court sought a detailed report from the GST department after an amicus curiae raised concerns about the lack of GST compliance among cooperative societies in the state. The amicus pointed out that several societies were running unregulated multi-deposit and chit schemes, accepting deposits and disbursing loans at interest rates higher than those of nationalized banks.
Revenue Loss to Centre and State Governments
According to the report, a significant number of cooperative societies are evading GST, stamp duty, and registration charges while conducting chit and deposit scheme businesses. This widespread non-compliance has reportedly led to substantial revenue losses for both the central and state governments.
The GST department’s findings are expected to influence stricter regulatory measures and reinforce the need for cooperative societies to ensure full compliance with GST laws to avoid penalties and legal action.