The GST is out as the Prime Minister Narendra Modi officially launched it in the hall of Parliament late midnight on Friday. It’s the day many of us were waiting for.
In the current context, it’s the loan market that has been constantly abuzz with the news of interest rates falling apart grabbing the headlines in newspapers more often than not. The falling interest rates have definitely brightened the prospects of loan seekers who were earlier denying the expensive offers. But will it be the same as GST is launched now? Let’s find out the GST impact on loans here.
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How Much of an Impact Would be On Loans in GST Era?
Banks and other financial institutions provide a slew of loans to boost their credit growth. Some of the popular loans include a personal loan, home loan, car loan, business loan, etc. What’s common among the loans was the levying of service tax, which used to be at 15%. But as soon as GST rolls out, the 15% service tax will be replaced with a standard 18% rate, thus making it an expensive affair. Since different loans can have different charge structure, it would be better to study each of them separately.
GST Impact on Personal Loan
In the case of a personal loan, a couple of charges includes service tax. Normally, the processing fee and prepayment charges are the ones wherein service tax is levied. But now, a standard GST rate will be charged. Processing fee used to be 1%-2% of the loan amount plus service tax across banks in India. So, if the loan amount is ₹9 lakhs, the processing fee could be ₹9,000-18,000. Service tax was expected to be ₹1,350-2,700. Adding all that, the processing fee ranges from ₹10,350-20,700 before GST. But now with GST coming into effect, the processing fee would jump to ₹10,620-21,240.
Similarly, the prepayment charges will also change now. In the pre-GST period, the prepayment carries a charge at 2%-5% of the outstanding loan plus service tax. So, if the outstanding loan is ₹2 lakhs, the prepayment charge would be 4,000-10,000+15% service tax. The combined total will be ₹4,600-11,500. But as GST is rolled out now, the very same amount will go up to ₹4,720-11,800. The effect of tax rise is not pinching at all. So, no worries, as you can come all the way to apply for a personal loan online at GST rates.
GST Impact on Home Loan
The impact of GST on the home finance segment is tricky to understand as a lot of things are still not clear. What’s clear though is the processing fee levy where 18% rate will be applicable instead of 15% at the present time. Processing fee, as of now, stands at 0.25%-1% of the loan amount along with applicable service tax. So, on a loan amount of say ₹25 lakhs, a processing fee of ₹6,250-25,000+S.T. of 937.50-3,750, used to be levied. The eventual amount after calculation comes as ₹7,187.50-28,750. With GST, the same processing fee will be converted into ₹7,375-29,500.
As far as prepayment is concerned, the floating rate home loans do not bear any charge. The fixed rate home loan, on the other hand, used to be charged at 2%-3% of principal outstanding plus service tax at 15%. Post-GST, it will be 2%-3% of principal outstanding+18%. So, what are your thoughts on applying for a home loan at GST tax slab? I am sure, the price rise won’t bother you much when you look at the difference in terms of rupees.
While searching for a home loan, a buyer must know the tax implication on the state of the property, be it under construction or ready-to-move-in property. As far as under-construction property is concerned, a 12% GST rates will be applicable on the sale of the property that also includes the land value.
GST Council has reduced the GST on affordable housing schemes from 12% to 8% which means if someone is purchasing an Under Construction property, and is eligible for PMAY, he shall be liable to pay a concessional GST on the property. Concession granted is 4%. Also, if you are not eligible to get PMAY subsidy on home loan then you cant get the concessional GST. you have to pay the complete 12%.
The developers are required to pay 28% tax on cement and 18% on steel, which they can claim in full through Input Tax Credit (ITC) while paying the tax on the completed property. Even though the developers can claim full ITC, they can still keep the property prices higher due to their liability of paying tax on the overall housing unit. If the prices of homes do go up, it will ultimately make the loans dearer. Other charges such as stamp duty, which varies from state to state, will also be applicable on both under-construction and completed property even after GST. It is still not clear at what rate stamp duty will be applicable when the GST finally enrolls in India’s taxation calendar.
GST Impact on Dream 4-Wheeler (Car Loan)
The implementation of GST is likely to be a boon for those wanting to bring home luxury cars whose prices are expected to go down by 2%-6% due to the reduction in the overall tax incidence by about 7%-12%. Mid sedans and mid SUVs, on the other hand, can be dearer by 2%-5%. Small car prices may go up by 1%-2%.
Talking about the car loans, almost every charge includes service tax. Processing fee can be 1%-2% of the loan amount, while prepayment charges remain at 2%-6% of the principal outstanding. After calculating these charges, the service tax of 15% is added. Post-GST, a 18% tax rate will apply on these charges and others that are levied on a car loan. Looking to apply for a car loan at GST tax rates? You can do that online or visit the nearest bank branch for the same. The choice is yours, but the online option is convenient as you can do that anywhere, anytime.
Why Do We Need to Pay GST for Loan Preclosure?
Sometimes we get enough funds to pay off the outstanding loan balance in full without waiting for it to close out as scheduled at the time of sanction. This is called preclosure in loan terminology. This saves individuals from paying further interest to the lenders. If you look from the lender perspective, it can be seen as a lost opportunity to earn interest. So, they include GST in the overall prepayment charges.
Why Was GST Brought into Effect?
The complex multiple tax regime not only made things difficult for the business enterprises but also the common man of India who have had to constantly rejig the budget to deal with the inflating goods and services. Almost more than a dozen of taxes including service tax, VAT, sales tax, luxury tax, entertainment tax and others were levied on the products. Plus, the compliance rules were also complicated.
In order to simplify the tax structure, the government put itself on a hunt to find the plausible solution with GST. After years of brainstorming, the GST council has finally come out with a structure for Goods and Services Tax (GST) by stipulating four different rates of 5%, 12%, 18% and 28% while exempting many of the essential food items and others from the purview of tax. While some of the goods and services are likely to pinch the wallet of consumers, others may provide the much-needed relief to their finances.
As explained above, the loan costs are expected to move up given the information government has put out so far with respect to GST. But the rise is not expected to pinch the wallet of the borrowers.