One of the most remarkable economic reforms so far, the Goods and Services Tax (GST) is an inclusive effort to bring the entire nation under a single tax system. It is a strategic attempt to accomplish the idea of ‘one nation, one tax, one market’. With GST coming into effect, there has been a buzz about how it will affect the overall economy and specific businesses.
So, what led to the formulation of the GST structure? The earlier taxation system was mainly divided into two major categories- Direct Taxes and Indirect Taxes (Excise Duty, Sales Tax, Local Body Tax, Custom Duty, and Service tax). The several indirect taxes complicated the whole taxation system and also resulted in increased cost of goods and services. This complicated tax system was becoming a barrier to the progress of the economy.Additionally, it was also essential to consider the entire country as one market, for which uniformity in tax was a prerequisite. Paying heed to these necessities, the government formulated the GST, under which the indirect tax mechanism was simplified by subsuming multiple taxes at Central Level and State Level. The government has categorically divided all goods and services under five tax slabs – 0% (no tax), 5%, 12%, 18%, and 28%; and these will be applicable and remain constant throughout the country, thereby bringing in tax uniformity across the nation.
Indeed, this reform has impacted every sector of the economy and so is true for the banking and finance sector too. In the GST structure, the banking and financial sector has been categorised under 18% tax slab as against the earlier 15% service tax.So, let’s see how this increase of 3% will impact the loan segment of banking and financial industry. It is opined that EMIs for a home loan, auto loan, and personal loan will not get affected as service tax is not levied on them, but few miscellaneous cost such as loan processing fee, prepayment charges etc. will invariably go up as they attract service tax. For instance, there is no service tax levied on personal loan per se, yet the processing fee and prepayment charges for this loan will now attract 18% service tax. So, the processing fee will be computed as 1%-2% of the loan amount + 18% service tax; and prepayment charges will be computed as 2%-5% of the outstanding loan + 18% service tax. Similarly, for a car loan, the processing fee will be1%-2% of the loan amount + 18% service tax; and prepayment charges will be 2%-6% of the outstanding loan + 18% service tax. For home loans, the processing fee will be 0.25%-1% of the loan amount + 18% service tax. For prepayment, the floating rate home loans do not bear any charge. But, the prepayment charges of fixed rate home loan will be 2%-3% of principal outstanding + 18%.
Further, banks and non-banking financial companies anticipate a rise in demand for business loans due to the much-needed respite provided by the GST to this sector. The implementation of GST will ensure ease of doing business by subsuming multiple taxes, reducing production cost, reducing logistics cost, and by improving market expansion and removing area based exemptions. These factors will not only simplify and bring transparency in conducting business but will also encourage starting a new business and expanding existing ones – indicating that more small and medium enterprises will seek for a business loan. A business loan can be applied online and can be utilised for various business purposes, such as expansion, infrastructure, working capital, and other business requirements. Finally, compared to earlier 15% service, the new 18% tax slab is indeed an increase, and it gives an impression of the rise in loan cost, but the actual calculation definitely does not burden the borrower’s pocket. So, with GST coming into effect the loan industry might not see a slowdown.