How Does The Goods and Service Tax Affect Personal Loans

The Goods and Services Tax Act came into effect in India in July 2017 after more than 15 years of discussion, debate, deliberation and negotiation, amidst much uncertainty and confusion. The tax aimed to replace India’s complex taxation system with a one-nation, one-tax approach. While some sectors benefited from the new taxation system because they now could enjoy lower taxes, some sectors were adversely affected.

One sector that was adversely affected by the implementation of GST was the service sector which included banks, hotels and restaurants, and tourism operators. This in turn affected the people who used these services – you and me. In this article we discuss the impact of GST on personal loans and how it affected individuals taking personal loans from registered banks and Non-Banking Financial Institutions (NBFCs).

To clarify, a personal loan is an unsecured loan taken without the lender stipulating the purpose for which it can be used. A borrower can use this loan for a variety of purposes. This may be emergency medical expenses, marriage ceremony related expenses, house renovations or even for the purchase of a mobile phone. While this is a very attractive feature of the personal loan scheme offered by banks, interest rates can be rather high.

What is important to note is that there is no personal loan GST rate or GST on loans per se. However, GST is levied on the services charges attached to processing the personal loan and repayment. While under the tax regime in force prior to the implementation of GST, the tax on service charges was 15%, under the GST regime this increased to 18%.

To understand the impact of GST on loans classified as personal loans, one needs to understand the different charges and fees that one has to pay while obtaining a personal loan.

Processing Charges:

This usually varies from 0.5% to 2.5% of the loan amount, depending on the lender in question. Thus, if you took a loan of ₹500,000/-, the Processing Charges would be ₹12,500/- if the lender charged a rate of 2.5%. In terms of applicable GST on the loan, the amount would be ₹2250. This would have been ₹1875/- under the previous tax regime. For the personal loan borrower, this would work out to be a difference of ₹375/-. However, if the personal loan amount was ₹40,00,000/-, this difference would work out to be a neat ₹3000/-.

Verification Charges:

Some banks and NBFCs also charge the borrower a Verification Charge. The job of verifying the credentials of the borrower and his/her credit worthiness is usually often outsourced to a third party. This charge would also attract GST as a service rendered.

Delayed Installment Payment Charges:

Another charge affected by the increased rate of taxation under GST is the penalty paid on any delayed installment payment. This varies from institution to institution. For e.g., if your EMI amount was ₹25,000/- and the penalty imposed by the bank was 4% per month, then if you delayed the payment by a month, the additional tax you would have to pay would be ₹30/-

Other Charges Impacted By GST:

Apart from the above, other service charges levied by lenders on personal loans included premature closure charges. This is usually 2% to 4% of the foreclosure amount. A GST charge of 18% would then be applicable on the service charge paid to the lender. If applicable, the GST rate on labour charges of 18% would also be levied on the service charge paid to the lender.

Thus while the implementation of GST has not affected the EMI or equated monthly installments paid against personal loans taken, it has increased the amount of tax paid on service charges levied by lenders by 3%. The actual difference in real terms will vary on the quantum of loan and the service charges of the individual lender.