Chit funds can't be treated as fund management, says SC against CBEC's plea

In a relief to the chit fund industry, the Supreme Court (SC) has said that the government cannot impose service tax on the chit fund business, and observed that it cannot be treated as fund management, according to the current understanding.

The industry has challenged the government's order asking them to pay the service tax on the chit fund business, said industry representatives.

The Central Board of Excise and Customs (CBEC) of the Ministry of Finance has issued a circular in August 2007, asking the chit funds to pay the service tax as it was a service provided by these companies, covered under the 'banking and other financial services' definition.

The industry petitioned against the circular at the High Court (HC) of Andhra Pradesh and got a favourable order in July 2008. The HC accepted that the chit fund business does not amount to any service covered by the definition of 'banking and other financial services' according to the said term as defined in that provision, prevalent during the period. It has quashed the circular of the CBEC.

The Centre approached the SC against the HC order and the Court took up the matter on various aspects, including whether service tax is leviable on chit fund or not, with effect from June 1, 2007 — the date on which the Finance Act, 2007 came into effect.

An order issued by Justice A K Sikri and Justice R K Agrawal, on the matter observed that the fund management or asset management refers to a fund which is normally created by a business or an organisation for a specific purpose and then utilised for the said purpose.

"A bare look at the aforesaid definitions compels us to hold that chit fund cannot be treated as fund management as understood in the sense the term is known in business parlance," observed the Court.

"We, therefore, hold that the chit fund business was not covered by sub-clause (v) of sub-section 12 of Section 65 even after its amendment by [the] Finance Act, 2007," added the order.

The Court affirmed the HC order while overruling another order by Kerala HC in a related matter holding that the Court has taken an erroneous view.