With the levy of Goods and Services Tax, popularly known as GST, is referred to as one of the prominent reforms in an attempt to simplify the framework of tax structure and put the entire nation under a common tax regime. With the concept of one nation, one tax, one market, GST will incorporate the indirect taxes both at the central level and state level which can affect every sector of the economy comprising of banking and financial services.
The banking and financial sector has engaged itself in the slab of 18% service tax under the GST regime as against the earlier 15% service tax. If the loans can be considered to be one of the most preferred products of the banking and financial sector, the GST impact on personal loan the same can easily attract much attention. Now take a glimpse at how GST can affect the personal loan sector.
Apart from the variety of loans provided by banks and financial institutions, personal loan, home loan, car loan and business loan are preferred as the most popular selections. Although the objective of every type of loan varies, what runs identically is the application of service tax that remains fixed at a standard 18% rate with the origin of GST, an increase of 3% as against 15% under the former tax regime.
However, as per the SBI official, home loan, auto loan and personal loan EMIs will not shoot up as service tax thereby not get applicable on them, hence, they will not be taxable in accordance with GST regime. However, some one-time and miscellaneous cost such as prepayment charges, processing fee etc. will consistently go up as they attract service tax.
The major impact can easily be seen in the processing fees and prepayment charges which personal loan attracts. Generally, all the banks throughout the country charge the processing fee variably by 1%-2% of the loan amount plus the service tax. So, before the GST implementation, the calculation was somewhere 1%-2% of the loan amount plus 15% service tax, and post GST affect, it can be computed as 1%-2% of the loan amount in addition to 18% service tax.
For example, as per the old tax regime, if the loan amount is ₹10 lakhs, the processing fee could vary around ₹10,000-₹20,000 and service tax could amount to ₹1500-₹3000. Summing these two components, the processing fee would approximate from ₹11,500-₹23,000. But post-GST affect, the service tax for the similar loan amount will range from ₹1,800-₹3,600 resulting in the largely increase of the processing fee to ₹ 11,800-₹23,600.
This identical concept is applicable on prepayment charges as well. Prior GST affects, the prepayment charges were applicable at 2%-5% of the outstanding loan plus service tax. So, if the outstanding loan amount is ₹ 3 lakhs, the prepayment charge would vary somewhere around ₹ 6,000 and ₹ 15,000 plus 15% service tax i.e. ₹ 900 and ₹ 2,250. Thus, the sum total prepayment charges will amount to ₹ 6,900 and ₹ 17,250. But with the proper implementation of GST, the service tax for the similar outstanding amount will range somewhere between ₹1,080 and ₹2,700, resulting in an entire increase of the prepayment charges to ₹ 7,080-₹17,700.
Overall, there has been a rapid increase in the processing fee and prepayment charges of personal loan, with the enforcement of new service tax. It’s obvious, this increase is not a welcoming move when it comes to reducing the burden of the borrower’s pocket. But this may open up the plethora of opportunities for getting a personal loan for business if you do not want to get a separate business loan.
GST Impact on Personal Loan EMI
Let’s understand how GST would have an impact on the personal loan EMI from a simple example:
Suppose you have availed a personal loan of ₹ 8 lakhs, the processing fee amounting to 1% which stands out to be ₹8000.
On this ₹8,000 , previously the service tax was applicable at 15% which is ₹ 1200 but now with the levy of GST at 18%, the processing fee would arrive at ₹ 1440. Therefore, an increase of ₹ 240 will clearly be seen on a loan amount of ₹ 8 lakhs. If the processing charges are 2%, the increase would clearly be ₹ 480.
The similar impact can be seen in the prepayment charges as well. Prior GST times, the prepayment charges carry the fees around 2% to 5% of the outstanding amount + applicable taxes. So, if the outstanding amount is ₹ 2 lakhs, ₹ 4000 will be arrived after calculating the prepayment charges (assuming 2% charge).
The above changes are one-time charges however not recurring in characteristic.