Impact of GST on finance sector/loan industry

With the introduction and implementation of GST, the indirect tax structure is going to change in a dramatic way, making it a single tax system. This is going to replace the existing central and state taxes levied by the respective governments. It will cover everything including manufacturing, sale or consumption of goods and services. This one tax system is expected to reduce the chances of tax evasion and making the system transparent. Procedural compliance and paperwork will also reduce to a great extent.

Impact of GST on Financial Sector

Naturally, GST will have a significant impact on the working of the industries including financial services. The first concern that the experts have is that it may increase the cost of banking and financial services. Post-GST, service tax is going to be in the range of 18% to 20%, instead of the existing 15%. Therefore, services such as fund transfer, credit card payments, ATM transactions, and processing fees on loans will be marginally costlier, particularly for retail customers.

The impact of the compliance issues will be felt only after the complete implementation of GST. Though the banking sector has recommended that GST should not cover financial and banking services, it will be clear only after the implementation. The wide geographical reach of the banks will also be impacted with GST. When they have multiple branches in the same state, they will have to obtain state-wise registration. Since banks have presence in multiple states, it will create compliance issues and obtain centralized’ registration under service tax. This is going to make the process of filing returns as a service tax assessee extremely complicated.

There will be other issues involving compliance when the banks will have to decide the place of consumption where the GST will be required to be paid. Determining the place of use will be complicated. There will be issues involving CGST, SGST and IGST as well.

Impact of GST on Loan Sector

Home loan

Impacts of GST on home loans are still not clear and speculations are rife on its full impact. Monthly instalments on home loans for under-construction properties will draw GST. Since the construction material now would receive input tax credit, builders may decide to pass on the savings to some extent to the home buyers making it slightly more affordable. Moreover, since the cash flow in the system is more than sufficient, demand for loans is weak and therefore, no change is expected in EMIs for home loans and car loans.

Auto loan

With the implementation of GST small cars with petrol engine of up to 1200 cc and less than four meters in length will attract a cess of 1% and for small diesel cars having engine capacity of less than 1500 cc will attract 3% cess. SUVs, mid-sized cars and luxury cars will have to pay 15% cess. So, increase in car prices will have an indirect impact on the car loan along with increased service charges on loan processing charges. Since prices for small cars to come down the loan will be more affordable. It is now to watch if this saving for the car buyers will be offset by increased processing fees.

Industry/business loan

With the introduction of GST, more and more small businesses will come under taxation. For the smaller units which were not under the taxation earlier, the compliance cost will go up post GST while the unification and single tax regime will bring down the compliance cost for the tax-paying organizations, irrespective of their sizes. In spite of budgetary pressure due to higher compliance cost, any business would definitely need finance either in the form of working capital to run its day-to-day operation or investment capital for expansion. As the banking service will be at a higher tax bracket (18% as opposed to 15% at present), the cost of fund is expected to go up adversely affecting the sentiment of the borrowers. However, transparent financial records and better adherence to rules and regulations will help the Government to frame policies that would uplift borrowers’ sentiments and will boost their confidence on the system. It is also expected that better legal compliance will also help financial institutions to feel more confident before approving the loans without apprehending much for potential NPAs.

Author

Amit Mittal
Founder & Chief Consultant Officer
eSilverbucks Consultants Private Limited

Mr. Amit Mittal is innovative as well as pragmatic in his work approach and entrepreneurial decisions. He believes in team building, managerial collaboration, and peer-to-peer cooperation. Mr. Amit Mittal is a splendid leader who impressively guides a team of more than 40 energetic people, and they work round the clock to deliver the best results. He has more than 20 years of experience in the Banking & Finance sector of India and serving some of the most reputed brands in the industry, such as ICICI.