Major effect of GST on Personal Loans

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The Goods and Services Tax Act came into impact in India in July 2017 after more than fifteen years of conversation, debate, thinking, and negotiation, amidst much anticipation and confusion. The tax sought to replace India’s complex tax system with a one-tax system. While some sectors profited from the new tax system because they now could enjoy lower taxes, some sectors were negatively affected. One sector that was negatively affected by the enactment of GST was the service sector which included hotels and restaurants, banks, and the tourism sector. This in turn impacted the people who used these services such as you and me. Let’s discuss the impact of GST on personal loans and how it affected people taking personal loans from banks and Non-Banking Financial Institutions (NBFCs). To explain, a personal loan is an unsecured loan taken without the lender specifying the purpose for which it can be used. A borrower can use this borrowing for a variety of intentions. This may be for emergency medical expenses, wedding ceremony-related expenses, home renovations, or even for the buying of a mobile phone. While this is a very appealing feature of the personal loan method offered by lenders, interest rates can be relatively high. This is important to note that there is no personal loan GST rate or GST on loans. Yet, GST is applicable on the service charges connected to processing the personal loan and repayment. Therefore, under the tax regime in force prior to the enactment of GST, the tax on service charges was fifteen percent, under the GST regime this increased to eighteen percent. To know the impact of GST on loans categorized as personal loans, one requires to understand the different charges and fees that one has to pay while obtaining a personal loan.

1. Processing Charges:

This usually varies from one to two percent of the loan amount, depending on the lender in question. Thus, if you took a loan of ?600,000/- then the Processing Charges would be ?15,000/- if the lender charged a rate of 2.5%. In terms of applicable GST on the loan, the amount would be ?2700. This would have been ?2250/- under the previous tax regime. 

2. Verification Charges:


Often banks and NBFCs also levy the borrower a Verification fee. The job of verifying the documents of the borrower for their creditworthiness is usually often delegated to a third party. This fee would also attract GST as a service generated.

3. Delayed Installment Payment Charges:


One more charge affected by the heightened rate of taxation under GST is the penalty paid on any delayed EMI payments. This varies from bank to bank. 


4. Other Charges Impacted By GST:


Other than the above, additional service charges levied by lenders on personal loans included early closure charges. This is usually two to four percent of the foreclosure amount. A GST charge of eighteen percent would then be applied to the service charge paid to the lender. Thus while the impact of GST has not involved the equated monthly installments (EMI) paid against personal loans taken, it has raised the amount of tax paid on service charges levied by lenders. The genuine difference in real terms will vary on the quantity of loan and the service fee of the individual lender.

Advantages of GST on Personal Loans

1. The tax imposed on borrowing activities is relatively low, making it a cost-effective option. For instance, if you borrow Rs. 1 Lakh, you would only pay Rs. 180 as tax, as illustrated earlier in the discussion on GST on Personal Loans.
2. With GST, borrowers only need to pay the tax once, simplifying the taxation process and reducing the tax burden.
3. The implementation of GST throughout India means that borrowers only have to pay a single tax instead of multiple taxes. This consolidated tax includes payments to both the central government and state government.

Disadvantages of GST on Personal Loans


1. The overall tax rate on loans has increased from 15% to 18%. Although the difference is minimal, it still raises the total cost of borrowing money.
In the case of obtaining a loan like a Personal Loan, it is essential to note that a GST of 18% is applicable to the processing fee and any pre-payment charges. This tax is imposed by the lender and subsequently forwarded to the relevant tax authorities. There is no need for additional procedures to fulfill the tax payment. The GST imposed on Personal Loans is relatively insignificant and can be considered negligible when compared to the loan amount. As long as you meet the eligibility criteria for a Personal Loan, you are eligible to obtain one at any time. It's important to remember that Personal Loans can be utilized for various purposes, including covering wedding expenses, meeting educational costs, or paying medical bills. To know more about How The Goods and Service Tax Affect Personal Loans visit the loans paradise today!