The Chit fund industry is facing a crisis with dropping patronage coupled with lower margins due to higher GST rates. All India Association of Chit Funds said the industry has seen a 10% decline in enrolment of new membership subscriptions year-on-year. The 12% GST levy increases the cost of borrowings for chit members, thus making fund access expensive. “Apart from higher cost of borrowings, in the last three months delayed payments from subscribers stands above industry norm of 25% of the monthly auction turn over. The most popular fund category at Rs 2-3 lakh accounting to 80% of the books is seeing lower membership traction. Though our strength is the last mile connectivity is the lower and middle income households and SMEs, we are now approaching bigger businesses too,” said TS Sivaramakrishnan, President of All India Association of Chit Funds.
Chit funds are indigenious pooled resources product. A fund operates as an association of people, who agree on a certain amount of money to be deposited periodically for a particular period. The Pot is auctioned off to the ‘winning bidder’, i.e., that member of the Chit fund who offers the highest discount for the bid. The balance discount is distributed amongst all the chit subscribers. However, the Chit fund, like banks and other NBFCs, bears the risk of delay and default in payments by subscribers. While, banking transactions and interest earned by banks and financial institutions are usually kept out of the GST net, chit fund companies feel they should be treated on par with other institutions.
In July, 2019, the Association in a letter to the union government requested its member to be exempt from GST, “Chit fund services are independent standalone services. This service does not become an input for any other service nor does chit fund depend upon any other service. We cannot claim any input tax credit nor do most our customers get credit of the tax charged by us. GST thread is not there in chit fund services and the chain will not be broken by granting exemption to chit fund services. The receipts from GST on chit funds is not a significant amount and therefore exempting chit fund services from the levy of GST will not have any major impact on the revenue to the government.”