GST rollout: From MF investments to insurance, here’s how it will impact your money life
A comprehensive analysis of how the tax reform will impact your investments
There is a general apprehension among people that due to increased rate of 18 percent applicable for financial services generally under GST, as against lower rate of 15 percent under the present Service Tax regime, the personal financial services will become costlier.
In my opinion, this is a difficult question to answer due to various other provisions which are part of the GST regime. Let us view these provisions broadly and then discuss the respective provisions for specific financial services which will impact the ultimate cost to the consumer.
What has changed for the financial service providers under GST?
Input tax credit for goods purchased by them
Since, the personal finance service providers were effectively rendering services only, they were required to be registered only under the service tax regulations. Therefore they were able to avail input tax credit in respect of services availed by them as well as any capital goods which were purchased from the manufacturer directly. However, they were not in a position to take any input tax credit of VAT (Value Added Tax) paid by them on goods purchased for consumption like stationery and other consumables.
GST covers both supply of goods as well as services. Thus, service providers will be able to avail the input tax credits for services as well as goods purchased for set off against output tax liability for services rendered by them. With the implementation of GST, cascading tax effect or double taxation on sale of goods and services will be eliminated.
Wider application of reverse charge mechanism under GST
In addition to the enlarged scope for input tax credit, an expanded provision in respect of the concept of reverse charge mechanism borrowed from service tax regime will adversely affect the profitability of all these service providers. Under present service tax regulations, the recipient of services has to pay service tax for some specified services availed by them. Thus, the scope of reverse charge mechanism is limited under service tax and is applicable in respect of some specified services received by the personal financial product/service providers. GST has expanded the scope of this reverse charge mechanism substantially. Under the reverse charge mechanism, service providers, which are required to be registered under GST, will have to pay the applicable GST for purchases of goods and services from any person who is not registered under GST.
Impact of increased compliance
The aforementioned service providers are now required to register in all the states under GST laws whereas under the Service Tax regime they could have obtained one centralised registration. This, coupled with number of returns to be filed going up substantially, will significantly increase the compliance costs of these service providers.
In my opinion, expanded scope of reverse mechanism coupled with increased compliance cost will affect the profitability of these service providers adversely. They will have to bear the cost of supplies availed from any small supplier of goods or provider of services who are not registered under GST, which they were not required under the service tax laws.
Impact on specific financial service/products
Impact on loans and credit cards
Before evaluating the likely impact of GST on personal financial services, it is very important for us to understand the components which will be impacted due to increased GST rates. For example, in case of loans, the main cost of taking a loan whether a home loan or a vehicle loan or a personal loan, is interest which you pay for using the money. This cost is not going to be impacted due to increased tax rates, as no service tax is levied presently on it and the same is not taxable under GST. Likewise, for credit cards also the interest charged for delayed payments is outside the scope of the levy of GST. However, in case the banks charge you any penal charges to compensate them for the delay or default, the same is subject to levy of GST.
Though the interest charged on your loans or credit cards is not subject to levy of GST, there are various other charges levied in connection with loans and credit cards. First and foremost is the processing fee paid by you, on which service tax being levied is 15 percent but tax liability will go up by 3 percent to 18 percent under GST. This will be a onetime cost and the average impact of the same for your whole home loan tenure will be very insignificant, but the same may be higher in case of a personal loan or a loan on your credit card. The banks may also recover other charges like advocate’s fee, valuation charges etc. in connection with home loans which will go up proportionately. However, any stamp duty charged in connection with documentation of your loan will not change with GST implementation as stamp duty is not subsumed with GST. All the banks charges like NEFT, RTGS, ATM withdrawal etc will go up due to increased 18 percent GST rate.
Like the processing fee paid at the time of application, you may have to pay prepayment charges in case you decide to prepay your loan before completion of the tenure or shift the loan to another lender. You may also have to pay fee for default on your EMI or delay in payment of your outstanding under a credit card which will go up by 3 percent. Likewise, the annual fee for your credit cards will also go up due to enhanced GST rate of 18 percent. Therefore it can be concluded that GST rates will go up by 3 percent on most of the charges recovered by the lenders.
Impact on your investments
Due to increased rate under GST, the cost for making your investments will shoot up marginally. Along with GST on brokerage charges paid for purchase and sale of shares through a broker, the GST will also be levied on the fund management charges levied by the fund houses in respect of the investments and redemption made by you. The impact of increased cost in respect of fund management charges are not visible as the same gets deducted from the NAV on daily basis and one does not get to see it directly in any of the mutual fund statements. The GST charges would also be levied in respect of any exit load charged by the fund houses in respect of the schemes on which exit load is levied in case the redemption is made before the specified period.
Impact on the financial planning services and tax consultancy charges
The increased rate of GST at 18 percent will be levied by your Financial Planner as well as the Chartered Accountant for fee charged in respect of services rendered to you in case the service provider is registered under the GST. With an increased limit for liability to register under the GST from 10 lakhs to 20 lakhs, it may happen that your Financial Planner or the Chartered Accountant may not be registered under the GST and thus may not levy the 18 percent GST. If you have availed personal financial services from such persons and are not registered under GST and thus are not covered under reverse charge mechanism , you may be able to altogether escape the net of GST in such a situation.
Impact on insurance products
The increase of tax applicable for insurance will vary depending on the particular insurance product. For term plans, ULIPS, health insurance, personal insurance, vehicle insurance and critical insurance the cost will go up due to impact of increase of tax from 15 percent to 18 percent. However, for other products like for Annuity the GST applicable would be lower.(it would be 1.8 percent instead of 1.5 percent earlier).. For endowment insurance plans, the GST for the first year premium would be increased from 3.75 percent to 4.5 percent and for subsequent years it would be halved of the first year rate.
Provisions of anti profiteering under GST
Due to changes in the rates, introduction of new provisions for expanded input tax credit across goods and services and reverse charge mechanism, the exact quantification on the cost would depend on the composition of goods and services consumed by the service provider as well as the cost of increased GST liability from unregistered suppliers under reverse charge mechanism. However, in case the net impact of these saving results into any cost savings to the service providers, under the GST laws all the suppliers are under an obligation to pass on all such benefits to their customers and clients in the form of lower rates of the services.
So in case there is any benefit under GST due to above reasons, the provider will have to pass on the same by way of reduced rates for services but the moot question is how to compute the exact impact of GST implementation as there are many variables like reverse charges working, expanded input tax credit base. In such a situation when it is not possible to quantify the impact of GST on their costs, I think lenders will not reduce any of their charges but will probably increase the same on the alibi of increased costs due to reverse charge mechanism.
In my opinion, though none of the service provider is in a position as to quantify and state whether the GST will reduce the charges or will it result into enhanced costs for the consumers ultimately, as per my understanding of all the factors taken together the overall costs for the consumer will go up in the form of higher costs.
I would rather keep my fingers crossed.
(The author is a tax and investment expert)
Silicon Valley Bank collapse: What happens to customers? Are their deposits secure?
After the collapse of California’s Silicon Valley Bank, its customer deposits are now under the control of the Federal Deposit Insurance Corporation. Insured depositors with up to $250,000 in their accounts will be able to access their money Monday. What happens to the rest?
Silicon Valley Bank Collapse: How Washington ended up rescuing US banks
Following a frenetic weekend of round-the-clock briefings, US policymakers took the audacious step of guaranteeing all of the failed Silicon Valley Banks' deposits, including those exceeding the Federal Deposit Insurance Corporation's $250,000 limit
Silicon Valley Bank Collapse: How can you protect your money if your bank fails?
Guarantees of hundreds of thousands of dollars are provided by organisations such as the Federal Deposit Insurance Corporation and the Securities Investor Protection Corporation. Building defences and having a few backup plans is simply good financial hygiene