Impact of GST on personal loans By Athulya - November 27, 2018 Last Updated at: Sep 24, 2020 3504 Impact of GST on personal loans The implementation of GST in India has not really made much difference in the sector of the personal loan. The levying of service tax was previously 15% which has now become 18%. Processing fee used to be 1%-2% of the loan amount plus service tax across banks in India. Adding all that, the processing fee ranges from ₹10,350-20,700 before GST. But now with GST coming into effect, the processing fee would jump to ₹10,620-21,240 GST or Goods and Services Tax has not impacted the personal loan. The only thing that has been impacted is the processing fee structure. At present, GST of 18% is charged on all services provided by the lender. GST (Goods and Services Tax) which runs on the concept of One Nation, One Tax, One Market has emerged as one of the most outstanding reforms in the Indian tax regime. The purpose of simplifying the tax structure has impacted all the sectors of the economy including financial and banking services. Previously, the financial and banking sector was found in the slab of 15% service tax. But after the implementation of GST, financial and banking sector has now come under the slab of 18%. Goods and Service Tax will be impacting the loan sector especially the personal loan sector. Out of all the forms of credit, a personal loan is a prevalent form due to it being multi-purpose. And one of the reason is personal loan generally does not necessitate of being collateral except in some cases. Impact of GST on a personal loan The implementation of GST in India has not really made much difference in the sector of the personal loan. The levying of service tax was previously 15% which has now become 18%. This means that there is an increase of 3% in the service tax. It is necessary to note that GST is doesn’t apply to the EMIs of home loan, personal loan and auto loan. This main reason is, in general, the taxes are not levied on EMIs. However, the one time all the miscellaneous costs such as processing fee, prepayment charges, and others will go up. Since such type of costs is paid for the service, it will come under service tax, which in turn will add 3%. Make Your Business GST Ready Increase in the service tax on prepayment charges On the outstanding loans banks generally, charge 2% to 5% as the prepayment charges. So, for instance, if Gautham has an outstanding loan of Rs.10 lakhs, then the prepayment charges will range between Rs.20,000 – Rs.50,000. The service tax at the rate of 15% on the same would have been less comparatively. But after the implementation of GST, the service tax will be increasing again. Increase in service tax on processing fee In general, all the banks charge 1% – 2% of the loan amount along with the service tax. Before the implementation of the GST, the service tax was calculated at the rate of 15% on the processing fee. However, after the implementation of GST, the service tax which is calculated will be 18% on the processing fee. For instance, let’s assume Gautham takes a personal loan of ₹5 lakhs. The processing fee, which ranges between 1% – 2% of the loan amount will be between Rs.5000 – Rs.10,000. The service tax then calculated would have been around Rs.750 – Rs.1500. But after the implementation of GST, the service tax calculated will be around Rs.900 – Rs.1800 causing an increase of Rs.150 –Rs.300. Even though there is a significant increase in the cost of attaining a personal loan, the liability of the increase in cost is not that high on the debtor. This is the reason why getting a personal loan is easy online and will be always considered as a popular option for finance.