The implementation of Goods and Services Tax, popularly referred to as GST, is one of the most remarkable reforms in the effort to simplify the tax structure and bring the entire nation under a unified tax regime. With the idea of one nation, one tax, one market’, GST will subsume the indirect taxes both at the central level and state level thereby impacting every sector of the economy including banking and financial services. The banking and financial sector has found itself in the slab of 18% service tax under the GST structure, as compared to its earlier 15% service tax. As loans are one of the most sought-after products of the banking and financial sector, the GST’s impact on the same has caught much attention. So, let’s have a look at how GST will impact the loan sector especially the personal loan segment.
Among the various types of loans offered by banks and financial institutions, personal loan, home loan, car loan, and business loan are considered as the most popular picks. Though the purpose of each type of loan differs, what runs common is the levying of service tax that has been fixed at a standard 18% rate with the advent of GST, an increase of 3%, compared to its 15% under the earlier tax structure. However, according to an SBI official, home loan, auto loan, and personal loan EMIs will not go up as service tax is not levied on them, hence, they will not be taxable under GST. Yet, some one-time and miscellaneous cost such as loan processing fee, prepayment charges etc. will invariably go up as they attract service tax.
Remaining specific to personal loan – even though no service tax is levied on the loan per se, yet the processing fee and prepayment charges for this loan do attract service tax. Generally, all the banks across the country compute processing fee by accounting 1%-2% of the loan amount plus the applicable service tax. So, prior to GST implementation, the calculation would have been 1%-2% of the loan amount plus 15% service tax, and post GST implementation it will be calculated as 1%-2% of the loan amount plus 18% service tax. For instance, according to the old taxation system, if the loan amount is Rs. 10 lakhs, the processing fee could be Rs. 10,000-20,000; and service tax was expected to be Rs. 1,500-3,000.Adding the two components, the processing fee would range from Rs. 11,500-23,000. But, after the implementation of the GST, the service tax for the same loan amount will range from 1,800-3,600 resulting in an overall increase of the processing fee to Rs. 11,800-23,600.
The same concept applies to prepayment charges as well. Prior to the GST implementation, the prepayment charges were levied at 2%-5% of the outstanding loan plus service tax. So, if the outstanding loan is Rs. 3 lakhs, the prepayment charge would range between Rs. 6,000 and 15,000 plus 15% service tax i.e. Rs. 900 and Rs. 2,250. Thus, the combined total prepayment charges will range between Rs. 6,900 and Rs. 17, 250. But, with the roll-out of GST, the service tax for the same outstanding amount will range between Rs. 1,080 and Rs. 2,700, resulting in an overall increase of the prepayment charges to Rs. 7,080-17,700. Indeed, there has been an increase in the processing fee and prepayment charges of personal loan, with the new service tax coming into effect. Yet, this increase is not so overwhelming as to burden the borrower’s pocket. This also opens up the avenue for availing a personal loan for business if you do not wish to avail a separate business loan. The GST does not have any effect on the personal loan interest rates. There is no effect on the EMI (Equated Monthly Instalment). However, it affects other charges such as prepayment charges, late payment fees etc.