How Will GST Impact Banking, Mutual Fund, and Insurance?

The goods and services tax (GST) switch-over is all set to take place from June 30 mid-night. Ever since the GST Council fixed rates in various categories, the common man is trying to understand how it will impact him/her, especially the banking, insurance and mutual fund investments. It is important to know that GST would replace the service tax from July 1, 2017. Under GST, the service tax would increase to 18 per cent from the current 15 per cent.

Let us take a look at how GST will impact banking transactions, mutual funds and insurance.

Banking

Banking related transactions could become marginally expensive with GST implementation. Banking services like credit card payments, fund transfer, ATM transactions, processing fees on loans etc. would now be taxed at 18 per cent up from the current 15 per cent (service taxes @14.5% + Krishi Kalyan cess and Swachh Bharat cess). However, in the longer run, this increase could very well be offset by the input tax credit the banks would now be entitled to under the GST. Many services such as FDs, bank account deposits, etc., that do not have an associated charge currently continue to remain outside the GST net. The final list of exemptions from the flat 18 per cent tax rate are still awaited. Other banking services like new savings accounts opening on which service tax is not imposed currently will not be impacted after GST introduction.

Mutual Funds

In case of mutual funds, a Total Expense Ratio (TER) is charged from investors for managing funds and distributor commissions etc. Currently, the TER for mutual funds usually varies between 1.25 per cent and 2.75 per cent. With the implementation of GST rates, this would rise by 4-7 basis points. This would mean a marginal increase for investors. For example, a TER of 1.51 per cent would go up to 1.56 per cent, which means a marginal rise.

Insurance

Presently, a tax of 15 per cent is levied on an insurance premium. With GST, the insurance sector will this tax going up to 18%, especially for premiums of health, term, motor, etc., products. However, much of this is expected to be neutralised by the effect of tax credit offset. Moreover, different insurance schemes have different tax calculation. For instance, the charges associated with ULIPs – like the Policy administration charge, Fund management charge, mortality premium – are taxable and not the entire premium. So, to gauge the exact impact, one still needs to wait for the final rules that will clarify the exemptions and slab rates. The tax rate for premium payments on endowment policies will be 2.25%, up from 1.88%.

However, an important point to keep in mind is that the GST law states that any benefit on account of input tax credit needs to be passed on to the consumers. So, even if services appear to become marginally expensive in the short term, over time, the benefits will trickle down to the customers.

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