With the implementation of the GST, tax buckets are changed, also the way of doing business, as the cash outflow and timelines have been remarkably affected. One Tax concept of GST (Goods and Service Tax) has transformed the entire taxation structure of India. GST affects goods and all kinds of services. The name “Goods and Services Tax” means that all sorts of products and services come under GST.
Impact on PL, HL, BL Loans in GST Era
Banks and other financial institutions provide a slew of loans in order to boost their credit growth. Some of the popular loans include a personal loan, home loan, business loan, etc. What’s common among these loans was the imposing of service tax, which used to be at 15%. But with the Good and Services Tax (GST) rolls out, the 15% service tax has been replaced with a standard 18% rate, which makes it an expensive affair. Since different loans can have different charge structure, it would be better to study each of them individually.
GST Impact on Personal Loan
In the case of a personal loan, the charges include service tax. Normally, the processing fee and prepayment charges are the ones wherein service tax is imposed. But now, a standard GST rate will be charged on the loan. Processing fee for the loan amount used to be 1%-2% plus service tax across banks in India. The processing fee ranges from ₹10,350-20,700 before GST. But now with GST coming into effect, the processing fee would hike up to ₹10,620-21,240.
Similarly, the prepayment charges will also change now. In the pre-GST period, the prepayment charges were 2%-5% of the outstanding loan plus service tax. So, if the outstanding personal loan is ₹2 lakhs, the prepayment charge would be 4,000-10,000+15% service tax. The combined total will be ₹4,600-11,500. But after GST the same amount will get increased to ₹4,720-11,800.
GST Impact on Home Loan
The impact of GST on home loans is tricky to understand as a lot of things are still not clear. What’s clear though is the processing fee levy where an 18% rate will be applicable instead of 15% at the present time. Now, the processing fee is at 0.25%-1% of the loan amount along with applicable service tax. So, on a personal loan amount of say ₹25 lakhs, a processing fee of ₹6,250-25,000+S.T. of 937.50-3,750, used to be levied. The eventual amount after calculation comes as ₹7,187.50-28,750. But with GST the same processing fee will be ₹7,375-29,500.
The floating rate home loans do not hold up any charge. The fixed-rate home loan, on the other hand, used to be charged at 2%-3% of the principal outstanding plus service tax at 15%. With GST, it will be 2%-3% of the principal outstanding+18%.
GST Impact on business loans
Due to the GST impact on business loans, the loan became expensive because of the GST imposed at the rate of 18%. This increased the processing fees on GST business loans making it marginally expensive for borrowers. Nonetheless, the potential growth opportunities available to businesses make this small increase almost unimportant in the longer term.
Let’s have a look at the impact of GST on business and working capital flows
1. Input tax credit changes: As per the taxation system, any tax paid on a business expense that is not directly related to taxable sales is not available as credit. For example, tax paid on advertising expenses will not be available as credit.
2. Claims due to inverted duty structure: Inputs are taxed higher than the outputs, also the raw material excise duty is taxed higher than that for finished goods, leading to a situation where the excess is unused and gets collected. Under the regime, this excess is non-refundable.
3. Timeliness of input tax credit: The input tax credit availed is not captured in real-time, or in line with the current tax liability of the supplier. With Good and Services Tax (GST), the input tax credit amount depends on the compliance level of the supplier.
4. Advance tax payments: Under the GST regime, tax needs to be paid in advance, it was made applicable to only service tax. If an advance tax payment is received against supply at a later date, the tax is liable to be paid on the date of advance receipt.
5. Taxation of stock transfers: The VAT rules do not treat stock transfers as “goods” or “services”. However, with the GST, change stock transfers are included under the category of goods/services and are taxable too.
6. The impact of location in offsetting credit: Under GST, different state entities need to be registered individually. There are certain restrictions to offset a Central GST tax with an Integrated GST tax, which may create difficulties in offsetting tax input credits across locations.