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GST and its impact on Borrowing
August, 17th 2016

As per the new tax structure, tax will be levied on the various fees that the end consumer pays to the financial institutions. So various charges like the processing fee, legal fee etc on a loan will now be taxed as per the new tax rate.

For quite some time now the political and the economical world in India has been discussing the Goods and Services Tax (GST) rather heatedly. While the political players continue to do their work and may be divided over its advantages and disadvantages we can do our bit by understanding what the GST is all about and what impact it will have on our lives especially borrowings.

Understanding Goods and Services Tax

In India there are two categories of taxes; direct taxes and the indirect taxes. Direct tax like the income tax is the payment that you pay directly to the government based on the laid out rules and the rate structure. Indirect taxes are those which you pay indirectly as you pay to another person or organization that in turn pays it to the government. There are numerous indirect taxes in India which makes the tax structure complex; indirect taxes includes tax, excise duties, luxury tax, value added tax, service tax and many more. With GST the process of indirect taxation is likely to get streamlined which means that all various kinds of taxes will now come under a single umbrella. So no more paying multiple taxes; there will be a single tax that will constitute various erstwhile taxes. This tax will be levied on goods and services both. Thus the consumer pays a single tax at the last point in the supply chain and the benefit is passed on to those at the earlier stages.

How will GST impact borrowing?

Since the bill is yet to passed so what the final draft will say is yet not sure. However expectedly this important tax reform is will impacts all industries and the common man too! For the industry it is expected to ease the cost of doing business and also make it easier to comply with the taxation process since now there will be lesser departments to deal with.

For the end user it is expected that most everyday goods could become cheaper, while certain luxury items could become costlier. The final picture however will depend on the exact rate that is implemented for various sectors. Services are generally expected to become costlier and since banking and loans is mostly about services you can expect some changes there too.

As per the new tax structure, tax will be levied on the various fees that the end consumer pays to the financial institutions. So various charges like the processing fee, legal fee etc on a loan will now be taxed as per the new tax rate. The new tax rate is likely to be 20%, currently it is 14.5% so for the borrower can expect some increase in the cost of borrowing. Banking charges and insurance premiums will also come under this purview so these services are also likely to get marginally expensive.

Apart from loans, credit card borrowing is also likely to become expensive. Sometimes when a credit card is swiped it may attract the levy of service tax on the total transaction value. Thus swiping the card only on occasions where no processing/service fee is applicable makes sense. Any interest that is charged by the credit card company due to delay or default in payment will also attract additional tax thus making the overall credit card usage costlier.

As discussed earlier these are some expected changes after implementation of the new Goods and Service tax, exact impact can be gauged only after the bill is passed and implemented.

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