By Puloma Dalal, Jayesh Gogri, Chartered Accountants
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Amendment of Finance Act, 1994 in 2007 deleted the words “but does not include cash management’ from section 65(12)(a)(v) defining banking and other financial services – Later CBEC vide Circular No. 96-07-2007-ST dated: 23-08-2007 clarified that chit funds, was cash management service provided for consideration and, therefore, liable to service tax under “banking and financial services”- whether members of the chit fund association providing cash management services liable?
Facts: The appellants were running chit business in the State of Kerala and contended that they are not covered by the Kerala Chitties Act, 1975 as the Chit Funds Act, 1982 was not notified within the State of Kerala. Appellants also contended that service tax can be imposed only vide positive incorporation of the particular service and not by way of deletion vide a circular by invoking powers u/s. 37 of the Central Excise Act, 1984 read with section 83 of the Finance Act, 1994. According to the Appellants, Chit fund was a systematic and periodic contribution of fixed measure of funds deposited with a trustee. It was disbursed to needy persons through draw of lots (Chit/Kuri/Kurip). Trustee/ Foreman had his share as well as commission. It was not a money lending business and there was no debtor-creditor relationship between subscriber and foreman. It essentially was management of cash/fund generated and distributed without much time gap.
Held:
High Court held that liability to service tax of chit fund was sustainable as it was based on statutory provisions, and not on CBEC circular ibid. Plea that tax liability could not be imposed by deletion from existing provisions, rejected as power to tax includes amendment either by incorporation or by deletion. If statute grants power to tax particular instance, but gives some exclusion, and when the exclusion is deleted by amendment, it comes within the taxable net. After the amendment, all forms of cash management were liable for service tax, and it was not necessary to enumerate each of them. Reference to section 45(1) of RBI Act, 1934 was only made in the CBEC circular to show that financial institutions carried out the chit business as well. The plea that despite its existence since enactment of Finance Act, 1994 till the amendment in the year 2007, chit business was not made taxable does not provide any estoppel against the provisions of law. It was held that procurement of funds from different subscribers, putting it together, sharing dividend, disbursement of amount to prized subscriber after commission payable to foreman etc. was a service liable to service tax in the hands of a financial institution and power of exemption is inclusive of power to modify or withdraw it.
