GST makes Loan even dearer
GST makes Loan even dearer
Generally, people take loan when they don’t have enough cash for the intended use. But what’s the benefit if more cash is flowing out of your packet while availing loans? GST was aimed at benefitting the common man, but instead it will force you to shell out more money when you are already in distress.
There are a variety of loans provided by banks and other financial institutions. Among these, the most common ones are personal loan, home loan, car loan and business loan.
Although different loans are for different purposes, common actor among them is the tax rate applicable.
No matter which loan you avail, service tax remains fixed at 18%.
This is a sad aspect under GST since in earlier tax regime, applicable tax rate was 15%.
The sudden increase of 3% will definitely hurt the pocket of a common man.
The only silver lining is that EMI’s will not shoot up as service tax was not applicable on them. Some one-time and miscellaneous cost such as prepayment charges, processing fee etc. will consistently go up as they attract service tax.
Major impact will be seen on processing fees and prepayment charges.
Processing fees is the fee charged by banks as a service fee for loan that they are offering.
Prepayment chargers are those which banks charge if you repay the loan amount before the stipulated time limit.
All the banks throughout the country charge the processing fee variably by 1%-2% of the loan amount plus the service tax. So, before the GST implementation, the calculation was somewhere 1%-2% of the loan amount plus 15% service tax.
Post GST affect, it can be computed as 1%-2% of the loan amount in addition to 18% service tax.
For example, as per the old tax regime, if the loan amount is ₹10 lakhs, the processing fee could vary around ₹10,000-₹20,000 and service tax could amount to ₹1500-₹3000. Summing these two components, the processing fee would approximate from ₹11,500-₹23,000.
But post-GST affect, the service tax for the similar loan amount will range from ₹1,800-₹3,600 resulting in the largely increase of the processing fee to ₹ 11,800-₹23,600.
This identical concept is applicable on prepayment charges as well.
Prior GST, the prepayment charges were applicable at 2%-5% of the outstanding loan plus service tax. So, if the outstanding loan amount is ₹ 3 lakhs, the prepayment charge would vary somewhere around ₹ 6,000 and ₹ 15,000 plus 15% service tax i.e. ₹ 900 and ₹ 2,250. Thus, the sum total prepayment charges will amount to ₹ 6,900 and ₹ 17,250.
But after implementation of GST, the service tax for the similar outstanding amount will range somewhere between ₹1,080 and ₹2,700, resulting in an entire increase of the prepayment charges to ₹ 7,080-₹17,700.
So you can see, even if the monthly EMI does not rise, this increase is not a welcoming move when it comes to reducing the burden of the borrower’s pocket.
