Since its implementation, the Goods and Services Tax (GST) has brought about a significant shift in the country’s taxation framework. It consolidated multiple indirect taxes into a unified tax structure, making it easier for businesses to keep up with compliance requirements. It has also ensured a smoother flow of goods and services across state borders. GST has undoubtedly streamlined and simplified the overall taxation process, and it has also had a bearing on various financial aspects of business operations. For instance, it affects how businesses, particularly micro, small, and medium enterprises (MSMEs) access and utilize financing. Many lenders use GST returns as a reliable way of assessing the financial health of a business as well as the credibility of the entrepreneur. This has facilitated GST business loan access for a widening segment of MSMEs.
GST’s impact on business loans is not directly related to interest rates themselves. It affects ancillary costs related to accessing and repaying the loans. Although business loan interest rate and payments on loans are exempt from GST under the category of financial services, several additional fees and charges that businesses can incur during the loan process, like loan processing fees, documentation charges, prepayment penalties, and late payment fees, are subject to GST. It’s important for MSME entrepreneurs to factor in these additional tax implications, as they can add to the cost of borrowing. Let’s explore the impact of GST on business loans.
Let’s explore the impact of GST on business loans.
The interest on business loans is exempt from GST. This means that borrowers do not have to pay GST on the interest component of their loan repayments. Since interest is considered a financial service, it falls outside the purview of taxable supplies under the GST framework. As a result, businesses do not face additional tax burdens on the interest paid for their loans.
In contrast to interest, processing fees and other related charges (like documentation or administrative fees) incurred during the business loan process are subject to GST. The GST rate applied to these charges is 18%. As a result, borrowers must account for an additional 18% tax on any processing fees they pay when availing of a business loan. This increases the overall cost of the loan, especially when factoring in higher loan amounts or multiple fees.
If a business decides to pre-pay its loan, any associated pre-payment charges are also subject to GST at 18%. This means that in addition to the prepayment penalty, borrowers will need to account for the added tax cost on the prepayment fee amount.
While the interest on business loans is GST-exempt, borrowers should carefully account for the 18% GST applied to processing fees, pre-payment charges, and other service fees. Businesses may also be able to claim input tax credit (ITC) on these GST payments, depending on the loan’s purpose and the applicable rules under GST law.
For businesses that are registered under GST and are eligible for claiming input tax credit (ITC), there may be opportunities to offset some of the GST paid on these charges, provided the loan is used for business purposes. However, this benefit depends on the nature of the loan and how the funds are utilized, which can make the GST landscape for business loans complex to navigate.
Kinara Capital is an RBI-registered fintech NBFC that has already helped 83,760+ MSME entrepreneurs by providing easy access to collateral-free business loans. Kinara provides fast and flexible business loans to help MSMEs scale up. If you are a small business owner financing support from Kinara Capital could be the perfect choice to grow your business.
With an unsecured business loan from Kinara, you can tide over business expenses and invest in the growth of your company. The business loan can facilitate machinery purchase, inventory stocking, improving your premises, hiring skilled labour, expanding your footprint, etc. On the whole, these initiatives will lead to the long-term expansion of your business, helping you stay ahead in a competitive market. Business loans are a great way to capitalize on timed opportunities, and are particularly beneficial for MSMEs, which might not have the liquidity or resources to tackle unexpected expenses. Kinara’s loans can be accessed through an end-to-end digital process, which requires minimal documentation. Once approved, you will receive your loan directly in your bank account within just 24 hours, making sure that you have capital when you need it.
Business loan eligibility for MSMEs can vary from lender to lender. In the case of Kinara Capital, business loan eligibility criteria include:
You can take a 1-minute eligibility check on the myKinara App to find out if you qualify.
Business loan application processes can vary from lender to lender. At Kinara Capital, we have a fully online application process. There is a simple 3-step application process, followed by approval and disbursement. If you meet our MSME loan eligibility criteria, your loan could be processed in just 24 hours. Here’s a step-by-step explanation of Kinara’s loan process:
Step 1: Quick Eligibility Check: In less than a minute, you can find out if your business qualifies for the loan! You can access the eligibility check in seven different languages available on our website for a seamless experience.
Step 2: Screening: The business and the entrepreneur are screened following Kinara’s MSME loan criteria by validating the KYC and registration details.
Step 3: Document Upload: You need to submit your KYC, applicant, co-applicant, business KYC (ID and address proof), applicant PAN Card, business registration document, last 12 months’ bank statements, GST registration (if available), and business vintage proof.
Step 4: Loan Approval: Once you complete the process, your loan application will be reviewed, and if everything is in place, the Kinara officers will approve your MSME loan.
Step 5: Disbursement: Once your loan is approved, you will receive the loan amount directly in your account within 24 hours.
While the introduction of GST has brought transparency and consistency to the tax structure in India, it has also added a layer of additional tax implications that MSMEs should consider when opting for business loans, particularly the non-interest charges that are now taxable. MSME entrepreneurs should do their due diligence and be aware of these factors to ensure they make well-informed financial decisions and leverage any possible tax benefits, while ensuring compliance.
No, GST is not applicable on the interest payment of business loans.
Interest is considered a financial service, which is exempt under the GST framework.
GST is charged at 18% on processing fees and other administrative charges.
GST increases the total cost by adding 18% on fees like processing, but it does not affect the loan interest.
Charges such as documentation or administrative fees are subject to 18% GST.
