How Will the New GST Rates Affect Your Banking and Financial Transactions?

GST Impact on Financial Services

Tax on financial services transactions will rise from the current 15% to 18% as the goods and services tax (GST) kicks in on 1 July, making them marginally costlier.

The new GST rates will apply to some banking transactions, mutual funds, insurance, and the stock market, which were earlier taxed at 15%, including Krishi Kalyan cess and Swachh Bharat cess.

Application of GST on Services

GST applies to all services where there is a supply for consideration. So, in banking transactions such as credit card payments, fund transfers, ATM transactions, processing fees on loans, etc., where the banks are levying charges, increased tax rates would apply. This would have a slight inflationary impact.

The Central Board of Excise and Customs (CBEC), the nodal body for indirect taxes, would issue notifications clarifying exemptions from the flat 18% tax rate.

Exemptions and Impact on Deposits

Interest on fixed deposits, bank account deposits, etc., which do not attract a charge, will remain so under the new regime. The government on 19 May finalized the tax rates for the services sector.

90% of the services were placed in the 18% bracket, which in absolute terms is a marginal increase but is expected to reduce complexity in transactions and improve ease in availing of input credit.

Negative List and Service Tax Collection

Out of all services, 63 have been put on a negative list, which are exempt from tax. In 2016-17, service tax collection jumped to Rs 2.54 trillion from Rs 2.11 trillion a year ago.

Impact on Mutual Funds

Similarly, in mutual funds, the total expense ratio (TER) charged for managing funds and distributor commissions, etc., would increase by 4-5 basis points.

TER for mutual funds varies between 1.25% and 2.75%.

As you've noted, the implementation of the goods and services tax (GST) in India has increased the tax on financial services transactions from 15% to 18%. This increase applies to a variety of banking transactions, mutual funds, insurance, and stock market investments.

🔸 Banking Transactions: Any transaction for which banks levy a charge, such as credit card payments, fund transfers, ATM transactions, and loan processing fees, will now be taxed at the higher rate. This might slightly increase the cost of these services.

🔸 Mutual Funds: The total expense ratio (TER) for managing funds and distributor commissions is likely to increase by 4-5 basis points. TER usually varies between 1.25% and 2.75%, so you may notice a slight increase in the cost of these services.

🔸 Exemptions: The Central Board of Excise and Customs (CBEC) will issue notifications about any exemptions from the 18% tax rate. It's worth keeping an eye on these notifications to see if any of the services you use are exempt.

🔸 Services not attracting charge: Services like interest on fixed deposits, bank account deposits etc., which do not attract a charge will continue to be so under the new regime.

The government has placed 90% of services in the 18% tax bracket. While this is a slight increase in absolute terms, it's expected to simplify transactions and make it easier to claim input credit.

There's also a 'negative list' of 63 services that are exempt from tax. It may be worth checking this list to see if any of the services you use are included.

In conclusion, while the tax increase from 15% to 18% could increase the cost of some financial services, there might be exemptions and the potential for simplified transactions and easier input credit claims. Keep an eye on CBEC notifications and check the 'negative list' to see if any services you use are exempt.