Impact of GST on business loans: A comprehensive guide

Impact of GST on business loans: A comprehensive guide

The advent of the Goods and Services Tax (GST) in 2017 overhauled India’s convoluted indirect tax structure with a simplified, comprehensive regime. This tectonic policy shift has significantly impacted industries and financial services. One key area that has witnessed tangible changes is business lending. This article explores the various aspects of GST’s influence on business loans.

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Fundamental Nature of GST

At its core, GST subsumes all indirect taxes levied by the central and state governments into a single tax. It is applied on the value-add at each stage of the production and distribution cycle of goods and services. GST is ultimately borne by the end consumer. Financial services such business loans also fall under the ambit of GST and have been considerably influenced by it. .

Let’s look at some of the key ways in which GST has impacted business loans in India.

  • Increased cost of borrowing: With the implementation of Goods and Services Tax (GST) in 2017, the tax rate on financial services rose from 15% (under service tax) to 18%. This led to a marginal increase in the various costs associated with availing a business loan such as interest payouts, processing fees, pre-closure charges etc. However, the impact varies across different types and sizes of loans.
  • Simplified tax structure: One of the biggest benefits of GST for businesses is the simplified tax structure. Instead of managing multiple indirect taxes like excise duty, VAT, service tax etc., companies now need to deal with just one tax – GST. This reduces compliance burden especially for small businesses.
  • Access to GST-based loans: Under the GST regime, firms can utilise their GST returns to secure high-value business loans. This provides easy access to working capital for GST registered SMEs and mid-sized companies to meet immediate funding needs. However, interest rates tend to be higher.
  • Varying effect across sectors: The impact of increased tax rates under the GST regime has been varied across sectors. Sectors like construction, real estate have faced margin pressures while consumer goods, hospitality have gained from input tax credit mechanisms. Hence, the cost of capital has also diverged sharply.
  • Challenges for small businesses: Small and medium business enterprises have faced multiple compliance challenges under GST due to lack of financial and IT infrastructure. A large number of documentation requirements and the need for online systems and technical expertise have increased their working capital needs. This has made access to affordable credit more difficult for such firms.
  • Emergence of new age lenders: With NBFCs and fintech firms designing innovative products like invoice discounting, revenue-based loans etc. to serve capital needs of SMEs in a GST regime, the lending landscape has evolved dynamically. Though, the cost of borrowing remains higher than traditional banks.

Though one of the most significant changes to the Indian tax system in recent years, the impact of the implementation of GST is yet to be completely understood. With the advent of GST, business loans have become more expensive than before. However, GST on loan amount for business loans has made overall borrowing more streamlined and simple with a reduction in indirect taxation.

Understanding GST dynamics is now imperative for both lenders and borrowers to make optimal financing choices. Utilising tools like a GST calculator lifts the fog on actual loan costs.

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