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5 Financial products and services that GST will affect

01 July 2017
With the GST roll out here are a few financial product and services that are going to get expensive
 
 

“All the world’s a stagesaid William Shakespeare, and rightly soNo matter what happens, the show will always go on 

The financial world is no different. It is a stage where the shows of new developments and actions run continuouslyIt is barely still. Earlier this year, the Union Budget created a buzz. More recently. it is the roll out of the Goods and Service Tax (GST) that is holding people’s interest. The GST council has finalized the tax rates on goods and services, including those on financial services and products. These are set to increase to 18% from an earlier 15%.1 

Here are five important products and services that will be affected in the financial industry.  

Banking services 

Prime Minister Narendra Modaims to turn India into a digital country, and plans to achieve this through mobile and e-banking. Will GST affect this vision? Not reallyThe 3% increase in the tax rate will affect the cost of various banking services provided to customersWhile the new GST rate is likely to increase the cost of these servicesthe increase may be a meagre amount—not enough to affect the common man’s banking habits.

 

Insurance services  

The new GST rate of 18% is also applicable to the insurance sectorUnder the current tax regime, service tax is charged on the entire premium amount of pure life insurance plans. On the other hand, for plans such as Unit Linked Insurance Plan (ULIP) and endowment plans, service tax is charged only on the associated chargesCurrently, ULIPs are taxed at 14%,1 but will soon be taxed at 18%.2 Tax on traditional savings and investment plans will increase to 4.5% from 3.75%, in the first year. In the second year, it will rise to 2.25% from the current 1.88%2. Meanwhile, tax on term plans will increase to 18% from 15%.2  

However, it is expected that the benefit of input tax credit, if any, will be passed on to the consumers.3 You may experience an increase in other insurance premiums such as health and motor insurance.3 Insurance policies are likely to become expensive. But, this might not affect people’s buying habitbecause insurance is an essential part of most financial plans. 

Mutual funds 

The Total Expense Ratio (TER) is the estimated total cost of the fund to the investor, including the various charges. While most of these charges attract service taxthere is a cap on the TER. The new rate is likely to increase the cost of the different components of TER4.   If this pushes the TER beyond the allowed limit, it will become the Asset Management Company’s (AMC’s) responsibility to reduce management expenses.There will be no tax for Mutual Fund (MF) distributors earning up to Rs. 20 lakhs.1 For others, the rate will increase to 18% from 15%. For you, as an investor, the cost of MFs is likely to go up by 4-5 basis points.1 Thus, GST is unlikely to have a major impact on MF investments too 

Stock brokerage 

GST will also impact stock market trading. However, the degree of impact will depend on investment amounts. The brokerage you pay while trading will accommodate the increased tax rate.1 Such brokerage is usually a small percentage of the invested amount, which can be up to 1% for a transaction up to Rs 10,000.1 

Gold  

Even the shiny, yellow metal was not spared from GST. The council fixed the tax rate on gold at 3%, from the previous 2%5Increased gold prices could motivate people to shift to gold bonds. An advantage of shifting to bonds could be the interest that is earned on such bonds6. GST is also likely to affect gold making charges. Earlier, such services were exempt from tax. However, under GST, making charges will be taxed at 18%.6 So, buying or making gold could be slightly costlier after implementation of GST.6 

The bottom line  

Higher taxation on financial services will make them more expensive. However, whether this inflation will affect people’s buying habits will depend on individuals and the financial services and products concerned.

 

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