The Government of India has successfully standardized the indirect taxation regime across the nation with Goods and Services Tax (GST). This has brought an end to the several taxes that were applicable under Indirect taxes. When it comes to loans, especially business loans, GST has had a significant impact on borrowers. It has changed the working capital requirements of a business. Here are five facts Frequently Asked Questions (FAQs) about GST that every business owner should know.
FAQs on GST
1. Are loan transactions subject to GST?
As per GST, the definition of goods and supply excludes money to money transactions. A business loan is a transaction that involves money and it is not subject to GST. The council has exempted money to money transactions from the Schedule of GST rates. Hence, services in the form of extension of loans, deposits or advances where consideration represented as an interest is outside the purview of GST. Additionally, sale or purchase of foreign currency amongst dealers of foreign exchange or banks is not under the purview of GST. Thus, the interest on the loan will not be subject to GST.
2. Are processing fees charged by lenders subject to GST?
There is no GST on loans but this is only limited to the interest paid on the amount borrowed. However, services mean anything other than goods. It excludes securities and money but includes activities related to the use of money. This means the money to money transaction will be excluded from GST but the processing fee is an amount charged for the processing of a financial transaction. This falls under activities related to the use of money. Hence, processing fees are charged GST since it is a supply of service. The GST on processing of loans 18%; this has increased from the earlier service tax of 15%.
3. What are the changes in input tax credit?
Earlier, any tax paid on a business expense that was not directly connected with taxable sales was no longer available as a credit. However, with introduction of GST in business, the expenses incurred for advertising are now eligible for credit.
4. What are the norms for advance tax payments?
Under GST, advance tax needs to be paid on the date of receipt of advance. Earlier, the norm was also applicable in case of service tax. Hence, if the advance tax payment is received against a supply at a later date, then the tax is liable to be paid on the date of the advance receipt. This means business owners will have to maintain adequate funds to make the advance tax payment on time.
5. What is the impact of location in offsetting credit?
GST allows a centralized registration of business and there is no restriction on availing input tax credit across different locations. Different entities across different states need to be separately registered. It depends on whether they fall under Integrated GST (IGST), Central GST (CGST) or Union Territory GST bill. In the case of CGST, there are restrictions to offset the tax with IGST and this could lead to some difficulties.
It is important for business owners to keep the above-mentioned information in mind when applying for a business loan. Apart from the interest rate, they also need to consider the processing fees. They can use the business loan calculator in order to estimate the Equated Monthly Instalment (EMI) payable each month. The calculator will provide an estimated EMI keeping the loan amount and tenure at the forefront. Doing a thorough calculation will also help them plan the loan repayment within the given tenure.
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