What is GST?
GST, Goods and Services Tax, is an indirect tax that has replaced many indirect taxes, such as VAT, services tax, and excise duty. It came into effect on July 1, 2017. Goods and Services Tax applies to the supply of services and goods. Goods and Services Tax Law is a multi-stage, destination-based, and comprehensive tax that applies to every value addition. It is a single indirect tax for the whole country.
How does GST impact your financial planning?
When the government first introduced the GST in July 2017, it had an inflationary impact. Annual growth in the consumer price index (CPI) increased from 1.46% in June 2017 to 5.21% in December 2017. GST brought many business activities that were earlier outside the tax net within its coverage. Such action is bound to increase inflation as businesses pass their tax burden on to consumers. In July 2022, the GST council started levying 5% GST on pre-packaged items such as wheat flour, paneer, curd, papad, and buttermilk. When inflation increases, it means that you need to pay more for your needs. Subsequently, you will have less money to invest. Higher inflation means that you need to plan greater allocations and take higher risks to meet your long-term financial objectives,
Impact of GST on different investment instruments
Real Estate
Nearly 8% of the entire GDP of our country comes from real estate. Before the implementation of the GST, paying for a property that was under-construction entailed paying VAT, service tax, stamp duty, and registration fees. However, buying a finished house just required paying stamp duty and registration fees.
Applying GST will lower the cost of purchasing a home, mainly if you do it before construction. In addition, developers will also benefit from input credits on the GST they paid on the goods and services they provided, as potential buyers will bear that liability.
Since the government eliminated stamp duty with the implementation of GST, taxes imposed on real estate have also been simpler. This has increased the prominence of the impact of GST on the real estate sector. Without the input tax credit, the total amount of GST for all homes under construction will be 5%. For properties that are ready for habitation, GST is not applicable. Please consider the effects of GST on properties if you are considering buying a home.
Consider a property where the carpet area is up to 60 square metres and it is 90 square metres in a non-metro location. If so, you can include the property in the affordable housing scheme. If the value of this reasonably priced home is less than 45 lakh, it will attract 1% GST; otherwise, it will attract 5% GST. These are a few significant effects of GST on real estate.
In the tier-4 taxation system, builders must pay higher taxes but receive input credits later. Consequently, it is simple to see how GST helps the Indian economy.
Gold
Sovereign gold bonds were a better investment choice than jewellery even before the GST regime because of the following reasons:
- They are free of making charges
- No problem with storage
- You do not need purity certifications
- You receive market value at their maturity along with periodical interest
The GST regime has made investing in sovereign gold bonds even more attractive than doing so in gold jewellery. Gold attracts a GST of 3%, along with an additional 5% GST on making charges. Consider the instance of you purchasing a piece of gold worth INR 1,00,000. In the old regime, the final price for you would have been INR 1,25,633 after adding customs duty, excise duty, VAT, and making charges. After the implementation duty, the same quantity of gold now costs you INR 1,32,825. GST has increased the burden on you when you buy gold jewellery. However, GST does not apply to sovereign gold bonds, making them even more profitable to invest in than before. You can also use sovereign gold bonds as collateral for secured loans.
Insurance
Insurance is a kind of investment you make for your health and the secured future of your family. If you do not have medical insurance and you need to get medical services for yourself or your family, it costs you a lot and puts severe pressure on your finances. This, in turn, reduces the amount of money with you for your investments. ULIP is a plan that combines investment and life cover. Many individuals choose it for its dual benefit. Also, ULIPs give you tax benefits. In the GST regime, the tax burden on term insurance premiums, health insurance premiums, and ULIP charges increased. Payments and investments in these plans have become costlier now. The following table summarises the change.
| Category | Service Tax with SBC and KKC (pre-GST) | After GST |
| Health insurance premium | 15% | 18% |
| Term insurance premium | 15% | 18% |
| ULIP charges | 15% | 18% |
Business Loans
Investment in one’s own business can prove to be the most effective investment decision for some people. Businesspeople often require business loans to finance their enterprises. Business loans have become expensive after the implementation of GST. These loans attracted a service tax of 15% earlier. In the GST regime, these loans attract a GST of 18%.
However, companies can use their GST returns to avail of high-value GST loans. GST business loans are collateral-free loans for which you do not have to mortgage your property as collateral. With no requirements for extra financial documents, the process to get this loan is easy and quick. Money lenders evaluate your eligibility based on your GST returns.
Although the interest rate on business loans increased by 3 percentage points, making them costlier, the availability of quick loans without collateral can make your business investment simpler.
Equities
Before the implementation of GST, the service charge on the brokerage when you sell or buy equities was 15% (14% service tax + 0.5% Swachh Bharat Cess + 0.5% Krishi Kalyan Cess). In the GST regime now, you attract an 18% GST on brokerage + transaction charges + SEBI charges. GST will affect short-term traders more than long-term investors. For instance, an equity option trade attracts a brokerage of flat INR 20 per order. With the GST now at 18% on brokerage, the burden on an investor for each such trade is slightly higher. This does not significantly burden investors for a single trade. However, as short-term traders execute a much larger number of traders than long-term investors. Also, when you sell a stock, the transaction attracts a depository participant charge of INR 13.5 + GST per scrip, irrespective of the quantity of stock. As a result, GST makes long-term investing more attractive.
The implementation of GST is likely to have a long-term positive impact on your equity investment, owing to GST’s positive impact on businesses in different industries. For instance, the tax burden on end consumers declined under GST. In the previous regime, there were several taxes, including excise and VAT, which passed on a higher tax burden to end consumers. Owing to improvement in supply chain operations, GST helps automobile manufacturers in procuring auto parts at cheaper costs. These changes in the GST regime will help the automobile industry grow and investment in equities of these stocks will give you higher returns. GST has made logistics processes simpler by removing many taxes that made these processes costly and complex.
Mutual Funds
GST increased the total expense ratio (TER) of mutual funds, making them costlier. The total expense ratio measures the costs linked to operating and managing a mutual fund. In the previous regime, mutual fund transactions attracted a 15% service tax. After the implementation of GST, they attract 18%. The total expense ratio includes GST and the increase in GST increased the TER. This increase affects institutions, HNIs, and corporates who move in and out of the liquid and debt funds frequently.
However, GST can indirectly help mutual fund investments by supporting industries that these funds invest in; for instance, the automobile industry as we discussed earlier. By removing a multitude of taxes and simplifying business processes, GST helps businesses across industries.
GST on P2P lending
The following GST provisions apply to money lenders who invest in P2P.
- According to the GST provisions, the interest income on the money you lend is GST-exempt.
- However, GST applies when you pay the registration fees for opening an account with a P2P lending marketplace. But, when you register with LenDenClub, you do not have to pay any registration fees. Hence, you do not attract GST.
P2P lending with LenDenClub
P2P lending is one of the rapidly growing, technology-enabled investment opportunities in India. In the Fractional Matchmaking Peer-to-Peer Plan from LenDenClub offers annual returns of up to 10–12%* p.a. on your investment.
Conclusion
Undoubtedly, change is never simple. The same applies to GST as well. However, this tax system with the motto, “one nation, one tax”, simplifies a lot of issues and will help our economy in the coming years.