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Chit Funds — Service rendered does not fall under “banking and other financial services” — Not taxable under Service Tax

Circular No. 41/4/2002, dated 15-3-2002

F. No. 341/56/2001-TRU

Government of India

Ministry of Finance (Department of Revenue)

Central Board of Excise & Customs, New Delhi

I am directed to say that doubts have been raised as to whether the services rendered by a chit fund is classifiable in the category of taxable service under “banking and other financial services”. As per section 65(10) of the Finance Act, 1994, “banking and other financial services” includes asset management including portfolio management, all forms of fund management, pension fund management, custodial depository and trust services, but does not include cash management, provided by a banking company or a financial institution including a non banking financial company. The matter under consideration is as to whether the activity of chit funds falls in the category of fund management for the purposes of levy of the service tax on such activity.

The matter has been 2. examined by the Board in consultation with the Reserve Bank of India. The Reserve Bank of India has advised that the business of a chit fund is to mobilise case from the subscribers and effectively cause movement of such cash to keep it working. Therefore the activity of chit funds is in the nature of cash management, which is specifically excluded from the scope of the “banking and other financial services” as defined under section 65(10) of the Finance Act, 1994.

In view of facts 3. mentioned above, it is clarified that “banking and other financial services” will not include the service rendered by chit funds. Accordingly, the service rendered by chit funds will not fall in the category of taxable service as defined in section 65(72)(zm) of the Finance Act, 1994.

Trade and field 4. formations may be informed accordingly.

Receipt of this 5. circular may please be acknowledged