Goods and Services Tax Bill or GST Bill, officially called as the Constitution Bill 2014 (124th Amendment Bill) is a proposal for the national Value Added Tax and will be implemented from 1st April, 2017. This ‘Goods and Services Tax’ will be a composite indirect tax to be levied on manufacture, sale and consumption of the goods and services all over the country and will be a replacement of taxes as levied by the state and central government. It is being predicted that the Goods and Services Tax will be a significant step towards a reformation of indirect taxation in India. The main motto of the GST is to abolish all indirect taxes in the country.
Effects on Financial Services, Loans and Interest rates
With the new financial year 2017, the GST looks on track for the implementation from 1st April, 2017. However, it remains to be seen as how the industry adapts to the changes as proposed in the GST bill and how the GST bill will impact various sectors in India. One report suggests that no country in the entire world has been able to design a model meant for financial sector within GST Sector and thus it will a first time in the entire world, when the financial sector will come under the GST. It remains to be seen as how the finance sector will behave actually, when it comes under the GST in April, 2017.
Different sectors in India will show different effects with regard to GST. However, considering the financial sector, which is highly regulated is expected to show the following effect. Keep in mind that at present, the effective tax rate is 14%, which is charged on fee component of the transaction.
With the introduction of the GST, the effective tax rate will see an upward movement on all fee based transactions and currently tax rate, which is 14% will move in the bracket of 18%.
With the taxes on input services, which will increase, the operating expenses will also increase to a considerable amount.
The impact of GST Bills will result in the moderate increase in the financial services cost and the services in the form of loan processing, along with the debit and credit cards charges, and insurance premiums etc, will come dearer.
Currently the process of buying and selling of securities comes outside of the indirect tax slot. The GST will imply that Securities are goods and thus as a result, the securities in dematerialized form will be considered as services and thus all fund based derivate will fall under the GST.
All actionable claims are considered as services and thus bill discounting securitization is more to stand as affected.
An all important differentiation has to be made between fee based activities and fund based activities and such a differentiation has to be made, as revenue earned through CBLO (Collateral Borrowing and Lending Obligation) may come under the GST and thus a higher rate of interest will be levied upon.
GST will also impact the sale of shares of a private limited company and thus the shares models which are in fact excluded from the being considered as goods under the VAT, the future will decide the fate of these shares models. The time will tell if the sale of shares finds an exemption from GST or not. In the case of bad case, the GST will impact it badly as a rate much higher than the present rate will be charged upon. Thus, such a case would affect the way the transfer of shares will be done and will restrict the transactions to a great extent.
As regard to the financial services, the treatment of fund based activities will be the most impacted areas. The present scenario states that the fee based activities are levied a tax (service tax), which includes different kinds of charges and fees being charged as transaction fees either in lump basis or on per unit basis. While the fund based activities which are as of now out of tax net (leaving aside one or two exceptions), the GST will levy taxes on all sorts of services (with the exception of few).
The Taxpayer will have to deal with the different kinds of credit due to GST.
As financial firms can take credit of GST paid on the Goods, there may be some breathing space in the long term.
Currently, the taxes which are being labeled as Excise, Service Tax and VAT, will be abolished and single tax as GST will be applicable
With the introduction of GST, the tax structure will be easier and simple. The goods and services will be charged under a single umbrella and a single tax will be applicable. With the introduction of GST, the entire Indian market will be a unified market and may also see a seamless movement of goods across the state boundaries and thereby reducing the traction costs of the businesses. Since GST will not be applicable to the goods and services exported out of the country, the export oriented businesses will be under an advantage. With the GST, in the initial run may prove to be a costly affair, in the long run, it will lower the tax burden on people, thus lowering the prices of various goods meant for consumers. The abolishment of several tax departments may reduce some corruption and thus a better India can be dream of.
The GST is a dream concept for the country and ever since the country of France adopted this GST way back in 1954, nearly 140 countries have seen it introducing in their tax system. It’s the time for India to adopt this tax system and let’s see how it works.