GST and its Impact on the financial sectorRanjit Punja
Many are calling it the biggest tax reform since India’s independence. The Goods and Services Tax(GST), will change the current indirect tax structure and make it a single tax system throughout the nation.
This one nation one tax system is expected to reduce tax evasion and give rise to transparency. The amount of procedural compliance and paperwork will decrease immensely due to the subsuming of many consumption taxes and bringing it under one tax: the GST. Overall, consumers will benefit from the free movement of goods across the country without the burden of multiple taxes.
While the impact of the Goods and Services Tax rollout will touch every industry in India, the impact it has on the financial sector needs to be looked at in detail.
The financial sector which touches the life of every Indian, is one of the largest industries in the country, apart from being a major contributor to the nation’s GDP it is also seen as a key driver for future growth. There has been a lot of discussion but very little clarity on how things will change for the average Indian post GST implementation, hopefully this article should help.
GST and Banks
Banks charge a transaction fee for all the transactions that happen through them, this cost will rise from the 15% tax in the current regime to 18 % with GST. What this means is that a person must pay Rs.3 extra per Rs.100 for banking transactions.
Most banks have now applied transaction charges on cash withdrawals from different bank ATMs or cash withdrawals from branch. So, banking transactions such as credit card payments, fund transfer, ATM transactions, processing fees on loans etc., where the banks are levying charges, increased tax rates would apply.
GST and Loans
Let’s a delve a little bit into the matter of GST and its impact on borrowing. The view is that there would be a marginal rise in cost at points where the GST comes into play, for example say a personal loan, service tax in the earlier tax regime was levied upon the processing fee and prepayment charges, these are expected to rise but not to levels that would cause worry.
For example, processing fee, depending on the lender was charged at 1-2% of the loan and this fee would attract a service tax of 15%, now this would rise to 18%. A marginal increase in the cost of borrowing is also applicable for home loans, auto loans and personal loans.
GST and Mutual funds
The impact of GST on mutual funds will be minimal. The levy of GST will be on the Total Expense Ratio(TER) which is the measure of cost incurred by a mutual fund house to operate its mutual funds. The TER rate is expected to rise by 3%.
GST and Insurance
Be prepared to pay a little extra on your Insurance premiums. Insurance companies charge a service tax on term and health insurance products, delay in payment of insurance premiums and these charges are predicted to go up from 15% to 18%. However, some Insurance schemes such as the Aam Admi Bima Yojana, Pradhan Mantri Jeevan Jyothi Bima Yojana are exempted.
Let us now look at the changes that banks themselves must undergo as part of the GST roll-out.
Registration of Bank Branches
Banks having branches in different states must register in each state and this will come under the service tax compliance of that respective state. It is enough to register once for multiple branches in each state. This will increase compliance, reduce the pressure on documentation and help in ensuring seamless integration of accounts in various states.
Service tax for inter-branch services
Bank continuously provide services to each other, which are also taxable under GST. However, the Tax can be claimed as input credit for further set off.
Input Tax Credit under GST
Input Tax in simple terms is when you are paying tax for your output produced you can reduce the tax that you have already paid on inputs. Input tax credit is not allowed as per current tax structure. Under GST regime input tax credit will be allowed to be set-off against the taxes payable by the bank on making outward supply. However, they must maintain separate books of account to have a control for all input tax credit and utilized and unutilized credit.
We can conclude that the cost of financial transactions will be slightly higher for the end customers. Banks will have higher compliance cost due to registration of bank branches and inter branch services. Mutual funds are not largely affected by GST and hence the returns to consumers will not vary drastically.
The Goods and Services Tax is a necessary change that is expected to take India to a simpler and advantageous tax structure which will augment growth, but no implementation is without difficulty. The slight increase in costs in the financial sector should be taken as a bitter pill for a better future.