GST or Goods and Service Tax, is a unified tax system, which is imposed on the goods and services that replaces the multiple tax systems.
GST regulations have come into effect to India on July 1, 2017. Every goods and services are uniformly charged under this system, except for the petroleum, alcohol and electricity.
The following tax rates were implemented by India after the GST came into effect:
Tax rate was nil for some foods, newspapers and books, cotton cloth (homespun), and the hotel services.
0.25% tax rate introduced to semi polished and the cut stones.
5% tax was imposed on items like sugar, tea, coffee, herbs and spices.
For processed foods, computers 12% tax was applied.
The industrial intermediate goods, hair oils, soap and toothpaste, with 18% GST.
Luxury goods like fridge, ceramic tiles, cars and motorcycles, cigarette etc. with 28 % GST.
GST and Personal Loan
The services provided under Banking and financial sectors had a Service tax of 15% applied before GST came into existence. It means that there was a service tax imposed on every chargeable service.
After the GST was implemented, there came an 18% GST slab under this regulation to the banking and financial services. Thereby, it contributed to an increase in the rate of taxes in the financial sector.
Does GST Increase your Personal Loan Interest Rate?
It is obvious that there has been an increase in the tax rate for financial services after the GST was implemented.
Now, it is natural for you to be anxious to know about the impact of GST on the Personal Loan interest rate too.
Your finances cannot certainly bear a 3% additional GST rate which is quite huge and not fair.
For financial and banking sector, it is true that GST is levied, whereas the interest being paid in return for the personal loan refers to a particular rate paid in return for the use of the borrowed money. This is clearly not a service provided by the banking and financial sector.
So, GST is not imposed on the interest quoted on your personal loans.
Impact of GST on components of Personal Loan
If a service is provided by a financial institution or a banking sector, then it is taxed under 18% slab of GST.
Following are the rates at which the GST is levied:
1. Processing Fees:
Loan processing is a service provided by the financial institution. The processing fee hence comes under the service that complies GST principle.
Here a processing fee is maintained and GST is levied for this fee.
An example, if you have taken a personal loan of Rs.1, 00,000, and there is a processing fee of 5% for this loan amount. Then the processing fee charged is Rs.5000 and you can calculate the18% GST charged on the amount of 5000 which is calculated to be Rs. 5900 as a final figure.
2. Pre-Payment or Pre-Closure Fees:
Whenever you close a loan in prior or pay off the amount before the stipulated time, then the financial institution is providing a service by assisting you in the process of closing that particular loan.
For this, you are charged GST amount on the penalty or the pre-payment fees.
An example, suppose the personal loan if 1, 00,000 and this is the outstanding amount. The pre-payment charges imposed by the bank is 3%, and then the pre-closure fee is calculated to be Rs 3000 and on applying the 18% GST, the total amount gets calculated to Rs.3540.
How to save the GST Amount Imposed on Your Personal Loans?
You pay GST against a personal loan. Well, this amount is directly dependent on the fee charges like processing fee and the pre-payment fees.
So, it is always recommended to compare the charges that affects the loan, before you straightaway proceed with a loan application.
If there are low processing fee or prepayment fee, then the chances are that the GST amount you are paying on the loan will be reduced.
Meanwhile, it is advised to give care in the loan interest rates to have balance between these situations.
GST on Home Loans
For home loans, there is an impact which is similar to that of the personal loans. Here also, the GST will be imposed only if there are any processing fees and pre-payment fees.
When home loan is considered, the processing fee is 0.25% to the 1% of the particular loan amount. Thus, said that for a 50 Lakhs loan taken, the processing fees is calculated and the 0.25% which is Rs. 12,500.
So, GST is also imposed on the home loan pre-payment. It is also to be understood that the GST is levied only on the charges by bank, instead of the total amount. This case, there will be increase of 3% of the bank charges.
Why Was GST Brought into Effect?
It was difficult for the businesses and individuals of the country to deal with the fluctuations and complications in the tax system involved.
They had to face the challenges of inflation of the goods and the services. Many types of taxes like VAT, luxury tax, sales tax and service/entertainment taxes were imposed on the goods, which seemed complicated.
It was clear that the system lacked a unified tax system, and to simplify and ease this process, Government had come with the GST as a permanent accepted solution.
GST was a result of continuous thoughts and efforts to reduce the burden of tax system that prevailed in the country. Four slabs of 5%, 12%, 18% and 28% were used and also some essential goods and services were exempted from the tax.
It is a fact that some of the taxes have made it still difficult for people, however when looking at a wider perspective GST is a relaxation compared to the burden of multiple taxes.