Goods and Services Tax (GST) has a significant impact on various industries in India, including the lending sector. Lenders, including banks and non-banking financial companies (NBFCs), are affected by GST in several ways. Here’s how GST influences their operations and how changes in GST policies can affect them:

1. Input Tax Credit (ITC)

• Before GST: Banks and NBFCs were not allowed to claim input credit on certain service taxes paid, which increased the cost of services.
• Post-GST: Financial institutions can now claim input tax credit on services and goods procured for business purposes. However, since financial services like interest on loans are exempt from GST, the ability to claim input tax credit is restricted proportionately.
  • Impact: While ITC benefits reduce some costs, the inability to fully claim credit on exempt services still leaves a compliance and cost burden on financial institutions.

2. Taxation on Fees and Charges

• Lenders often charge fees for loan processing, documentation, and other auxiliary services. Under GST, these services attract an 18% tax. For borrowers, this can increase the overall cost of borrowing.
  • Impact on Lenders: The increased tax burden might reduce the attractiveness of certain financial services, though the lenders are merely collecting and remitting the GST.

3. Compliance and Administrative Burden

• Lenders are required to file GST returns and maintain detailed records for compliance. This can be burdensome due to the sheer volume of transactions and the need to classify them into taxable, exempt, and zero-rated categories.
  • Impact: Increased administrative costs and complexity in handling GST returns and filing.

4. Effect on Loan Repayment and Borrowing

• Loan Products: The core lending business of banks and NBFCs is generally not subject to GST since the interest on loans is exempt from GST.
• Impact of Policy Changes: Any increase in GST rates on auxiliary services (e.g., processing fees) directly raises the cost for consumers, which may impact demand for loans, especially in the retail and SME sectors.

5. GST on Services Acquired by Lenders

• Lenders purchase various services (e.g., audit, legal, IT services), which are subject to GST. The cost of these services increases with GST, and since financial services are largely exempt from GST, lenders cannot claim full input credit on these services.
  • Impact: Increased operational costs for lenders due to limited input credit availability, especially if they cannot pass these costs on to customers.

6. GST on Collateral and Asset Disposal

• When lenders repossess and sell assets, such as vehicles or machinery, due to loan defaults, GST is applicable on the sale of these goods.
  • Impact: The application of GST on the resale of collateral adds another layer of tax, which might affect the recovery value of the assets, thereby impacting the lender’s recovery process.

7. Impact of GST Policy Changes

• Increase in Rates: If the GST rates on financial services such as processing fees are increased, lenders may see a reduction in the demand for these services, as it could make loans more expensive for borrowers.
• Changes in ITC Policies: Any relaxation or tightening of input credit rules could either benefit or disadvantage lenders in terms of operational costs.
• Compliance Simplification: Any move towards simplifying GST compliance (e.g., fewer returns, easier credit claims) would be beneficial for lenders, reducing their administrative and compliance costs.

8. Non-Performing Assets (NPAs)

• GST on NPA Recovery: When lenders recover non-performing assets, they have to account for GST on recovered amounts (on services provided during the loan period), increasing the complexity and cost of dealing with bad loans.
• Impact: This adds to the cost of recovery for lenders, especially for smaller NBFCs dealing with NPAs.

Conclusion:

Changes in GST policies significantly affect the cost structure and compliance burden for lenders in India. While GST does not apply directly to loan products, the auxiliary services associated with lending, coupled with restrictions on input tax credit, affect profitability and operational efficiency. Any change in GST rates or compliance mechanisms can either ease or worsen the burden for lenders and influence their strategic pricing, product offerings, and customer engagement.