GST Impact on business loans

GST Impact on business loans

Following the advent of GST, business loans became more expensive. This is because the GST was imposed at a rate of 18%. As a result, the processing fees on these loans have increased, making them slightly more expensive for borrowers. In the long run, however, the potential growth prospects open to firms make this slight gain essentially insignificant. Here are some of the most important GST changes that will influence your business and working capital.

1. Input tax credit changes: Any tax paid on a business expense that is not directly tied to taxable sales is not eligible for credit under the taxation system. Taxes paid on advertising expenses, for example, will not be credited. GST incorporates a concept known as “Furtherance of Business,” which enables credit for any type of business input that is used or planned to be used in the course of or furtherance the business. A businessman can now claim credit for taxes paid on advertising services as well, providing him a lot of flexibility. The business’s working capital flow, as well as its line of credit, improved as a result of the lower cost of operations and higher net margins.
2. Claims due to inverted duty structure: In an inverted duty structure, inputs are taxed higher than outputs, for example, raw material excise duty is greater (12.5 percent) than finished goods (6 percent), resulting in an excess of 6.5 percent that is underutilized and accumulates. This excess is not refundable under the regime. Businesses can now collect the unused input tax credit accumulated as a result of the inverted duty system under GST. This, combined with a quick claims process, is a boon to firms’ working cash.

3. Timeliness of input tax credit: A businessman’s input credit is not recognized in real time, or in other words, in accordance with the supplier’s current tax liability. With GST, the amount of the input tax credit is determined by the supplier’s compliance level, making it mandatory for the supplier to record outward supplies together with the tax payment. In some ways, you could be held liable if your provider fails to provide valid returns. This could affect your cash flow since the input credit tax you claimed will be reversed, and you will be required to pay interest in addition to losing the credit. As a result, firms will be required to manage their vendors very well under GST.

4. Advance tax payments : Tax must be paid on advance receipt dates under the GST regime. Under the existing arrangement, this was exclusively applicable to service tax. If an advance is given against a future supply, the tax must be paid on the date the advance is given. The situation becomes concerning because, even if the company pays tax in advance, it is not immediately eligible for input tax credit. It can only be used once the products or services have been received.

5. Taxation of stock transfers: Stock transactions are not considered “goods” or “services” under the VAT regulations. Change stock transfers, on the other hand, are taxable under the GST because they fall under the categories of goods and services. Because the tax must be paid on the day of stock transfer, whereas input tax credit can be claimed on the date of stock liquidation, this move will have a direct impact on enterprises’ cash flows. How the company’s working capital performs in the interim can be a critical factor in maintaining its working capital levels.

6. The impact of location in offsetting credit: The Service Tax regime enables businesses to register in a centralized, pan-India manner. As a result, there are no geographical constraints on taking use of input tax credits. Different state entities, on the other hand, must be registered separately under GST. Depending on whether they fall under the Central GST Bill, the Integrated GST Bill, or the Union Territory GST Bill, they fall under different jurisdictions. Offsetting a Central GST tax with an Integrated GST tax, for example, is subject to specific limits. This could make it harder to balance tax input credits between sites.

7. To ensure healthy levels of working capital : a full examination of tax commitments and the impact of the four bills based on operational locations must be done at the outset. It’s also a good idea to look into options for obtaining working capital financing or a line of credit.

Importance of GST on business loans

Even though the GST increases the cost of obtaining a company loan, it is a welcome shift for business owners. Here are four ways in which the GST will be a significant tax change, particularly for business owners.

1. Simpler tax systems

The procedures became simplified with the elimination of various taxes and the creation of a single tax structure. The market grew simpler in terms of paperwork and accounting standards. Simple tax systems will make it easier for business owners to operate.

2. Competitive pricing

Consumer costs have fallen as a result of the GST’s elimination of all other types of indirect taxes. As a result, demand and consumption increase, which benefits business owners.

3. Boost in exports

Indian goods and services are priced competitively in foreign markets as production costs fall in the post-GST era. As a result, exporters compete with global manufacturers, hence increasing exports. Lenders are taking advantage of this potential development by expanding commercial loan disbursement to businesses.

4. Un-fragmented national market

With the introduction of the GST, entry tax barriers were removed, resulting in a more open national market for products and services. As a result, sourcing, warehousing, and distribution throughout the states became easier and faster. Businesses don’t have to pay interstate taxes, which frees up capital flow for expansion. Banks and non-banking financial companies (NBFCs) are seeing a rise in demand for business loans as businesses expand after the GST.

What Is The Impact of GST On A Personal Loan?

• One of the most notable improvements in the tax policy has been the GST’s One Nation, One Tax, One Market concept. Every area of the economy, including banking and financial services, has been affected by the goal of simplifying the tax structure.
• Previously, the banking and financial sector was subject to a 15% service tax.
• However, since the advent of GST, this industry has fallen into the 18% tax bracket.

Let’s take a look at how the Goods and Services Tax will affect the loan industry, particularly the personal loan market. A personal loan is one of the most common types of credit since it may be used for a variety of purposes. Furthermore, save under rare circumstances, a personal loan does not require collateral.

So, what is the impact of GST on a personal loan?

• In the personal loan market, the implementation of GST hasn’t made much of an impact.
• The service tax, which was previously 15 percent, has now increased to 18 percent. Your service tax will increase by 3% as a result of this.
• It should be noted, however, that EMIs for personal loans, home loans, and auto loans are not subject to GST. This is due to the fact that EMIs are often tax-free.
• However, one-time miscellaneous costs such as processing fees and prepayment charges will increase. Because such expenses are incurred in the course of providing a service, they will be subject to service tax, which will add 3% to the total.

How much increase will be there in service tax on prepayment charges?

• Prepayment penalties range from 2% to 5% of the outstanding loan balance, depending on the bank. So, if Rakesh owes a debt of 7 lakhs, the prepayment penalties will be between 14,000 and 35,000 rupees.
• The service tax on the same, at a rate of 15%, would have been between $2100 and $5250. However, following the application of GST, the service tax will rise to $2520-6300, representing a 420-1050 increase.

How much increase will be there in Goods & service tax on processing fee?

• In general, banks charge between 1% and 2% of the loan amount + service tax. The service tax was computed as 15% on the processing fee prior to the advent of GST. However, with the implementation of GST, the service tax assessed on the processing charge will be 18%.
• Let’s say Rakesh takes out a personal loan of Rs. 5 lakhs. The processing charge, which ranges from 1% to 2% of the loan amount, will be between $5,000 and $10,000. The service tax would have been estimated in the range of 750 to 1500 dollars.
• However, with the application of GST, the computed service tax will be 900-1800, resulting in a 150-300 increase. Even though the cost of obtaining a personal loan has increased, the borrower does not bear the brunt of the cost increase. As a result, acquiring a quick personal loan online will always be a popular way to get money