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There is general perception that due to the increased rates of 18 per cent, the Goods and Services Tax (GST) for services rendered by the lenders, as against the lower rate of 15 per cent under the Service Tax regime, home loans will become costlier. However, this is not as straightforward as it seems.
What are the home loan processing items on which the GST will be levied?
Before evaluating the likely impact of the GST on home loan costs, it is important to understand the components that will be impacted by the increased rates under the GST. The main cost of taking a home loan, is the interest payment on the money. This cost will not change, as there is no service tax or GST on it. Similarly, any stamp duty charged in connection with the documentation of the home loan, will not change with the GST, as stamp duty is not subsumed under the GST.
However, there are various charges that are levied by lenders on home loans. First and foremost is the processing fee that is paid at the time of taking the home loan. At present, it is 15 per cent but it will go up by 3 per cent under the GST, to 18 per cent. This is generally a one-time cost and its overall impact on your home loan tenure, will be insignificant. The banks may also recover other charges like advocate fees, valuation charges, etc., in connection with the home loan, which will go up proportionately.
Like the processing fee paid at the time of application, you may have to pay prepayment charges, in case you decide to prepay the home loan before the completion of its tenure or shift the home loan to another lender. This is generally payable, in case the home loan is taken under a fixed rate of interest. For floating rate home loans, banks cannot levy any prepayment charges. Housing finance companies can, however, levy the prepayment charges, if you decide to shift the home loan to another lender. However, for payment of the home loan from your own resources, the housing finance companies cannot levy any prepayment charges.
The lenders can also charge you for any EMI default, either due to return of the cheque or ECS return, on which the GST rates will go up. So, it is practically on all the charges that are recovered by the lenders that the GST rates will go up by 3 per cent.
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How are lenders affected by GST?
As the lenders were rendering services and thus, were required to register under the service tax rules only, they were entitled to take input credit, with respect to the services availed by them, as well as any capital goods purchased from the manufacturer directly. So, the lenders were not in a position to take any input credit for the VAT (Value Added Tax) paid by them, on goods purchased for consumption like stationery and other consumables.
With the implementation of the GST, which covers the supply of goods and services, the lenders will be able to avail of the taxes paid on such supplies as well. This will bring some tax savings for the lenders, as the input credit with respect to the services availed, as well as goods purchased, will be available for set off, against the GST output taxes liability.
However, the reverse charge mechanism, which is borrowed from the service tax regime and which is expanded under the GST, will adversely affect the profitability of banks. Under the reverse charge mechanism in service tax, the recipient has to pay service tax on certain specified services. Thus, the scope of reverse charge was limited under the service tax regime. The GST has expanded the scope of this reverse charge mechanism. Now, the lenders who are required to be registered under the GST, will have to pay the GST for purchases of goods and services from any person who is not registered under the GST, in addition to their liability to pay under the reverse charge mechanism for some other specified services, like services of advocates or services of transporters.
Moreover, lenders are now required to register in all the state under the GST, whereas, under the service tax regime, they could have obtained one centralised registration. This will significantly increase the compliance costs of the lenders. This will adversely affect the profitability of lenders, as they will have to bear the cost of supplies availed from any small supplier of goods or provider of service who is not registered under the GST, which the lenders were not required to do under the service tax laws.
Anti-profiteering provisions under the GST
Under the GST laws, all the suppliers are obligated to pass on the benefits of reduced rates on their input supplies, as well as benefits due to availability of input credits on expanded base, to their customers and clients, in the form of lower rates. So, the lenders will have to pass on any such benefit by way of reduced bank charges. However, the moot question is, how to compute the exact impact of the GST, as there are many variables like reverse charge and expanded input tax credit base. In such a situation, when it is not possible to quantify the impact of the GST on their costs, lenders are unlikely to reduce any of their charges but will probably increase the same, on the pretext of increased costs due to the reverse charge mechanism.
(The author is a taxation and home finance expert, with 30 years’ experience)