What is the Effect of GST on Different types of Loans?

Shubham Chauhan

22 Oct, 2019

GST (Goods and Service Tax) has emerged as a lightning reform in the Indian Tax history. It is an indirect tax imposed by the government, which has replaced many indirect taxes in India. History of GST begun in the year 2000, the Prime minister of the country during that period introduced the concept of GST. A committee was set-up to design a GST model for the country. After numerous attempts to bring this reform in the existing tax regime, it finally came into effect on 1^st July 2017. Now after its implementation, the effect of GST is fairly visible on the Indian Economy. After its implementation, the effect of GST can be seen in all the sectors of the economy including financial and banking services.

Effect of GST on Personal Loan

The implementation of GST has not brought much of a difference in Personal Loans. While, in the case of Personal Loans, the Service Tax is levied on a couple of charges, which includes the processing fees and prepayment charge. After the implementation of GST, both these charges have changed. Usually, Banks charge 2%-5% as prepayment charges on the outstanding loan, and 15% service tax.

Now, as there has been an increase in the tax by 3% from 15% to 18%, the prepayment charges have also gone up slightly. Further, when we talk about processing charges, banks generally charge 1%-2% of the loan amount plus the service charges. Post GST, there has been a 3% increase in the Tax, which ultimately has led to an increase in processing charges as well. Therefore, the effect of GST can be seen in the increased processing and prepayment charges while applying for a Personal Loan.

Effect of GST on Home Loans

Buying a home is one of the happiest moments of one’s life. Home Loans help a lot of people in fulfilling their dream of owning a house. After GST there has been a slight increase in the cost of home loans. Earlier for home loans service tax was charged at 15% which has now gone up to 18%.

This increased rate applies to the processing fees and other charges that are levied on home loans. The processing charge is generally between 0.25%- 1% of the loan amount along with the service charges, which has increased by 3% after the implementation of GST. This increased rate of tax applies in ready to move-in homes and not in the under-construction homes. For under-construction properties, a 12% GST rate will be applicable.

GST council has reduced the GST on affordable housing schemes from 12% to 8%. Therefore, if someone buys an under-construction home under Pradhan Mantri Yojna (PMAY) will get a concession of 4% in GST.

Effect of GST on Car Loan

GST on cars in India is applicable across multiple slab rates of 5%, 12%, 18%, and 28%. The most relevant GST rate for cars is 28% which applies to personal as well as commercial vehicles. The lowest GST rate of 5% applies to carriages for use by disabled people and related accessories.

GST on Cars for Personal Use

Vehicles that are used for personal use such as motor cars, motorcycles, and even bicycles feature GST ranging from 5% to 12%. In case of personal vehicles effect of GST applies to the accessories of the vehicle as well. Likewise, vehicles such as rickshaws, hand carts, etc fall under the category of 12% GST. 18% GST applies to vehicles such as cars for physically challenged people, baby carriages, etc.

The highest percentage of GST i.e 28% applies to motor vehicles(petrol or diesel) used for the transport of people including racing cars as well. This percentage of GST is also applicable to Motorcycles and Mopeds with or without side-cars.

GST on Commercial Vehicles

Commercial vehicles are those which are used for carrying passengers, goods, etc. The GST rate for commercial vehicles ranges between 12% to 28%.

12% GST rate applies to the following vehicles:

• Tractors other than road tractors
• Trailers used for agricultural purposes

18% GST rate applies to the following vehicles:

• Buses used as public transport which operates on Bio-fuel.
• Refrigerated motor vehicles
• Special purpose vehicles such as crane lorries, concrete mixer lorries, etc
• Various parts of the tractor such as gearbox assembly etc

28% GST rate is applicable to the following vehicles:

• Road tractors used for semi-trailers with engine capacity exceeding over 1800cc
• Motor vehicles used for the transport of goods
• Motor part accessories.

Effect of GST on Business Loans

The contribution of small businesses and MSMEs to India’s GDP is around 37%.  Implementation of GST affected business loans both in positive and negative ways. Business Loans got expensive after the implementation of  GST. As an effect of GST, processing fees on these loans got expensive. The tax after the implementation of GST rose by 3% from 15% to 18%. This makes availing a loan business a bit pricey. However, as an effect of GST growth opportunities have increased for businessmen.

Need of GST on Loan Preclosure

In some cases, it happens that borrowers manage to gain enough funds to pay off the outstanding loan amount before the time as mentioned at the time of sanction. This saves the money of the borrowers which they had to pay as interest. But on the other hand, the lender loses an opportunity of earning interest. To avoid this situation, GST is applied to overall prepayment charges for the Loan.

Conclusion

After the implementation of GST, the cost of loans has gone up. This is a result of an increase in Tax from 15% to 18% after the implementation of GST. Although, this increase in the cost of loans has not much affected the pockets of borrowers. The long term opportunities for businesses that are available after the implementation of GST nullifies the slight increase in the cost of loans.

Suggested Reads:

• How GST has Changed the Real Estate Sector?
• Impact of GST on Sales Promotion Schemes in India
• What is the Impact of the GST on Restaurant Services