After a long wait, the Goods and Sales Tax (GST) bill was finally passed in the monsoon session of Rajya Sabha in 2017. The tax reform bought by this bill is considered to be an epic decision in the financial history of the country. However, with the passing of the bill, the queries over who will it benefit, what will be its implications, and will it really be a game changer (as most people consider it to be), so on and so forth! With this article, we try to unveil certain facts related to the benefits of GST.
The Goods and Sales Tax (GST) has created a lot of ripples in the investment markets, and with the abolition of octroi duty, excise duty, custom duty, and similar duties and taxes, a huge transform in the transportation industry is awaited. Similarly, with an indirect tax on cement coming down and logistics costs coming down, reforms in the construction sector is awaited. With the reduction in economic distortions, expanding the tax base, and creating a single tax base by eliminating cascading taxes, the benefits of GST are immense.
With a lot of reforms awaited, it is expected that a lot of new players will be entering the markets in the near future. With the service tax increasing from 15% to 18%, mutual funds are expected to be a bit expensive and lower the returns on mutual funds due to higher expense ratio. However, as Neil Parekh, CEO of PPFAS Mutual Funds puts it, the impact of the tax reform on mutual funds will be marginal. He adds, “There is no need for the AMCs or the investors to change their investment strategy. GST will not impact mutual fund investors specifically, except a hike in the TER,” (Source: http://economictimes.indiatimes.com/mf/analysis/how-gst-will-impact-your-mutual-fund-investments/articleshow/58802103.cms)
Impact on Loans
With the GST implementation increasing service tax to 18%, loans such as personal loans, home loans, car loans, etc., are going to be a costly affair. For availing personal loans, processing fee and prepayment charges are the transactions where service tax is levied. The processing fee was 1-2% of the loan amount plus service tax and prepayment charges were 2-5% of the outstanding loan amount plus service tax. So, if a person was looking to avail a loan of Rs. 9 lakhs, the processing fee with service tax would range between Rs. 10,350 – Rs. 20,700 (with Rs. 9000 – Rs. 18,000 being a range of processing fee). With GST implementation, this range would increase to Rs. 10,620 – Rs. 21,240.
Similarly, for home loans, the processing fee was 0.25-1% of the loan amount plus the service tax percentage. So, for a loan amount of Rs. 25 Lakhs, the processing fee along with service tax would be Rs. 7,187.50 – Rs. 28,750 (processing fee being in the range of Rs. 6250 – Rs. 25,000). However, post-GST, this range would increase to Rs. 7,375 – Rs. 29,500. Thus, due to increase in the service tax component, there will be a slight increase in the processing fee and prepayment charges levied with applying for loans.
Impact on Insurance
Term insurance plans, Ulips, and Endowments are majorly three types of insurance products that are available. With service tax component applicability is different for all three kinds of products, and service tax only levied on risk portion of the premium, the impact of GST will be seen on all the three products. The immediate impact of GST on this sector would be a higher outflow in terms of endowment and term plans. So, there would be a 3% increase in premium from the existing premium rates, on life, health, as well as general insurance.
With GST impacting marginally or major investments, it is important to look into the various tax components before finalizing on the investment plan.