GST rates: Financial services transactions to become marginally dearer (2024)

Mumbai: 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 stock market which were earlier taxed at 15% including Krishi Kalyan cess and Swachh Bharat cess.

“GST applies to all services where this a supply for consideration. So, in banking transactions such as credit card payments, fund transfer, 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," said Saloni Roy, partner at Deloitte Haskins and Sells.

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. Interest on fixed deposits, bank account deposits etc., which do not attract a charge will remain so even under the new regime.

The government on 19 May finalized the tax rates for the services sector. Ninety percent of the services were placed in the 18% bracket, which in absolute terms is a marginal increase, but is expected to reduce complexity in transaction and improve ease in availing of input credit. Out of all services, 63 have been put in a negative list, which are exempt from tax. In 2016-17, service tax collection jumped to Rs2.54 trillion from Rs2.11 trillion a year ago.

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%.

“The tax component is contributing to only a marginal increase in the TER. However, overall, the expense charges have gone up 75 basis points in the past five years and with the increase in taxes, the difference in TER from then to now will become 80 basis points," said Manoj Nagpal, CEO, Outlook Asia Capital, a consulting and wealth management company.

Mutual fund distributors earning up to Rs20 lakh will remain exempt from GST, while those earning more will see their tax rate increased from 15% to 18%. The hike from 15% to 18% will apply to the insurance sector as well, but the final rules which will clarify the exemptions and slab rates is still awaited.

“While (insurance) products like motor, health, term have all the premium categorised as risk premium, so a 18% tax rate is understandable. The rules should have sensitivity for products such as endowment plans and unit-linked pension and insurance plans (Ulip)," saidJoydeep K. Roy, partner and leader (insurance) at PwC India.

Under the current regime, insurance schemes have varied tax calculation—Ulip charges levied by insurance firms attract 14% tax and for endowment plans tax rate is 3.5% for first year and 1.75% for second year, he said adding he hoped a similar tax structure was devised under GST.

In stock trading, the brokerage, which is a small fraction of the invested amount, would include the increased taxes. Depending on the volume of trades, brokerage can be a maximum of 1% for a transaction value of Rs10,000. The service tax component comes to about 0.5% of the transaction value.

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