Goods and Services Tax and its impact on financial services

You can see people discussing the Goods and Services Tax (GST) at every nook and corner of the city. It has been reported about in newspapers and every news channel seems to feature experts debating on it. Some people thought that this would simplify our indirect tax system, while others disagreed. The government claimed this would bring an end to unhealthy competition between states. And this move will affect almost every industry involved in the manufacture, sale, and consumption of goods and services at the state and national level.

What is GST?

GST is a value added tax that has been divided into Central Goods and Service Tax (CGST), State Goods and Service Tax (SGST) and Integrated Goods and Service Tax (IGST). As the name suggests, CGST must be paid to the Centre, SGST to the state and IGST is a tax levied by the Central government for the supply of goods and services between states. GST will replace all the taxes levied by the central and state government with respect to goods and services.

How does the GST affect financial services?

Financial services are professional services that help people manage and multiply their wealth. They can range from banking to tax consultancies, insurance and stock market to mutual funds. GST is the biggest tax reform in the country since independence and will replace Value Added Tax (VAT), Octroi taxes, Central Excise and other complicated taxes. But, all is not rosy, as it changes several existing protocols in the banking sector.

Transaction fees in financial services are bound to rise, as they were previously taxed at 15%. Under this scheme, transaction fees will be taxed at 18% and while this will not drastically affect companies, it will increase the amount individuals will have to pay for each transaction. Banking activities, like interest paid on the savings account and loans availed, will also incur GST. The operating costs of the bank will soar and it may be difficult to implement GST on a large scale in this sector.

Impact Of GST on Loans, Insurance and Investment Banking

Only time will tell the impact of the new regime on financial services. Immediate repercussions include higher interest rates that can slow down the economy, but in the longer run, it can aid in growth and development. For builders and construction companies, GST is welcome, as it helps avoid multiple taxations.

With the increased tax rates, it might become difficult for borrowers to avail loans and other financial services. For example, the taxes and legal processing fee for loans were fixed at 14.5% for the borrower, but now under the GST, it has been increased to 20%. Service tax for credit cards is also going to rise, thus making the process of opening up our economy difficult. The real estate sector, which accounts for 5% of our economy will benefit from the slew of measures introduced. The buyers will be initially impacted, but with decreased rates for developers, the cost of buying a house will come down. The higher taxation rate can hence be annulled.

In the immediate run, the growth rate that was cruising at 8% for the last two years will reduce, owing to demonetization and GST. According to the government, this is a necessary evil that will help develop our economy. With increased foreign inflow of funds and setup of factories, our flagship programs like Make In India and Digital India are going to get a helping hand. This will aid in building a better and transparent economy.

Know about How GST Will Help SMEs In Securing Credit

Advantages for consumers

-          There will be uniform tax rates across the nation. This will help consumers avail services at same rates nationwide.

-          Multiple central and statewide taxes have been abolished, thank to the GST. This will help consumers file taxes with more ease.

Disadvantages for consumers

-          GST can have several consequences on the economy in terms of inflation, growth and the income for the government.

-          The threshold for paying tax has decreased from Rs.1.5 crore to Rs.10 lakhs and this will impact Small and Medium Enterprises (SMEs). They will be burdened into paying tax post the implementation of GST.

-          The cost of products will increase, which will affect the consumer, who avails services from banks or NBFCs.

Closing note

The GST is all set to revolutionize our economy this July. While there are advantages and disadvantages to this bill, only time will tell if it is the right move for the financial sector and for our country.