The Goods and Services Tax (GST) became the source of much debate when it came into effect in 2017. The underlying idea behind introducing the tax provision has been to weed out the complexity of paying multiple taxes under various pieces of legislation.
GST affects nearly everything we purchase. So it is only natural to wonder – does the all-encompassing GST regime affect your loan amount or EMIs? The answer to the question of GST on loan amount isn’t a simple one. But we explore it in detail in this blog.
As its name suggests, GST only applies to goods and services – which means, it can’t apply to loans. However, in practice, GST applies to loans in a very indirect manner. This is because in the process of disbursing a loan, the bank or lender ends up offering the applicant a number of services which are taxable. These services include processing, foreclosure and bounce charges.
Earlier, loans would come with a web of taxes, driving up the final amount considerably. However, with Goods and Services Tax, the process has become a lot more transparent and smooth. Continue reading for how GST on loan amount occurs across various categories of loans.
The GST applicable on the processing fees on personal loans is 18%. The typical processing charges of a loan tend to be 2% to 3% of the loan amount. The prepayment charges of a personal loan – the amount charged by a lender if the personal loan has been closed before the completion of the tenure – also attract 18% GST. Personal loan EMIs, however, remain unaffected by GST. The overall GST on loan amount in this category is negligible.
With the advent of GST, business loans have become more expensive than before. Earlier, a 15% tax was levied on these loans but now 18% GST is applicable on these loans. However, GST on loan amount for business loans has made overall borrowing more streamlined and simple with a reduction in indirect taxation. Businesses must also be aware of the effects of GST on their overall working capital. This has been discussed in one of the following sections.
The processing fee on home loans is 18% as well, just like personal loan. The typical processing fees on home loans make up about 0.25% to 1% of the loan amount.
However, the impact of GST on renovation and construction is a bit more complex. While the tax on under construction properties is 18%, a reduction in the cost of land brings down this rate to 12%. So GST on loan amount for home loan seekers under construction will ultimately result in smaller EMIs.
For those buying ready-to-move-in homes, the builders absorb the cost of GST. The increase in taxation does not impact the home buyers themselves. This is because for builders, the single taxation system reduces tax obligations from 20% to 25% to 12% to 18%. The benefits of this tax reduction have been passed on to the buyers.
The GST on two-wheelers under 350cc engines is at 28%, while motorcycles above 350cc engines will attract a tax of 31%. Earlier, two-wheeler loans would levy taxes on processing fees, prepayment charges as well as a service tax. Lenders can levy an 18% on services provided as GST on loan amount of a two-wheeler loan.
As for electric vehicles, the implementation of GST has increased their prices. The prices of spare parts also carry a 28% tax under the new regime. When availing a two-wheeler loan, buyers will have to account for all these increased expenses.
Since the services industry levies 18% GST, the amount of taxes to be paid by these businesses has increased considerably. This has impacted the procurement of raw materials via imports. However, under the new regime taxes on the inter-state movement of goods have been reduced.
For any business, the increased cost of imports as well as the reduced cost of movement of goods need to be accounted for when seeking a working capital loan. Only after accounting for these can one determine the GST on loan amount for business loans.
The long and short of it is this – even though the goods and services tax does not impact lending directly as there is no GST on loan amount, the overarching effects of the tax regime have undeniable ramifications when it comes to various types of loans.
For any prudent loan seeker, understanding how GST affects their loan principal amount and even EMIs should be paramount. Loan seekers should account for two things to calculate their GST on loan amount– a) GST implications for the underlying asset for which a loan is being sought, and b) GST on the actual services being provided by the lender like processing and prepayment.