gst on business loan

Impact of GST on Business Loan Interest & Its Processing Fee

December 05, 2022 • 4889 views

Since its implementation in July 2017, the Goods and Services Tax (GST) has eliminated the confusion regarding indirect taxation in India. Over the years, its impact has also shaped the economy by revising the various interest rates applicable to taxable services. 

In this blog, you will get a detailed explanation of the influence of GST on Business Loan interest rates and processing fees.

Introduction of GST

The GST was devised to unify several indirect taxes like the central excise duty, services tax, VAT, etc. It came into force in July 2017 and eliminated the need to furnish multiple taxes.

During loan disbursal, the GST component comes into play just like any other taxable service. For instance, if you are planning to take a Business Loan, you have to bear a processing fee upfront, which attracts a GST charge. This happens because offering a loan comes under core banking services. So, it is evident that GST influences all the conventional loan categories.

Impact of GST on Business Loan

Since the GST was implemented, the cost of availing Business Loans has slightly moved up because loans are not considered under the remit section of GST provisions. Thus, you can notice the following effects of GST on the money-lending business:

1. GST on Processing Fees

The processing fees cover all the individual charges your potential lender needs to spend while evaluating loan applications and initiating the disbursement. Also, a lender has to bear some administrative costs to support actions necessary for determining the exact compliance requirements.

As the GST impacts these cost components, some nominal costs have been passed on to borrowers. Generally, you have to furnish 1-2% of the loan amount as processing fees. Before GST, this amount used to be levied as a service tax of 15%. After the new tax regime came into effect, the processing charges are now exercised with a surplus of 18% GST.

2. GST on Interest Rates of Business Loans

To date, no direct impact of GST has been witnessed on applicable Business Loan interest rates. Neither the payable principal has been impacted nor do the borrowers have to furnish additional interest rates.

3. GST on Pre-payment Charges

When a business owner intends to repay their loans early, they have to bear a foreclosure fee ranging between 2-5% of their outstanding balance. Before the GST, these charges went up to 15%. But after 2017, the pre-payment charges attract an 18% GST similar to processing fees.

Also Read: What is GST? Meaning & Types of GST Returns

Eligibility Criteria to Apply for a GST Business Loan

Now that you have a fair idea of GST on a Business Loan, let’s go through the eligibility requirements so you can proceed with the application process:

You should either own a:

  • Partnership Firm
  • Public Limited Company
  • Private Limited Company
  • Sole Proprietorship Firm

Apart from these, banks also offer GST business finance to retailers, wholesalers, and traders involved in import-export business.

Key Points to Note About GST on Business Loans

The GST on a Business Loan is distinct compared to that applicable for working capital loans. Here’s how:

  • The business firm has to bear the GST on the amount they are borrowing for funding capital investments.
  • To avail of a Business Loan, all the filed GST returns will be required.
  • Furnishing the tax amount involves minimal paperwork.
  • The credit score is not considered while applying GST on a Business Loan.

Additionally, you would not have to pledge any assets while opting for a Business Loan. Overall, the implementation of GST on Business Loan interest rates and processing fees should be understood carefully before applying for a loan.

Also Read: Is A Business loan secured or unsecured?

Why Should You Apply for a Business Loan?

Irrespective of the charges and taxes, a Business Loan is beneficial when it comes to fulfilling the need for additional capital. It is one of the fastest and safest methods of getting funds needed for a business.

You can find a few additional reasons below that justify the relevance of a Business Loan:

  • Instant Loan Approval
  • Minimal Documentation
  • Loan Up to Rs.50 Lakh
  • Competitive Interest Rates

How to Apply for a Business Loan Online?

You can easily get a collateral-free Business Loan at favourable terms from reputed NBFCs like Poonawalla Fincorp:

  • Step 1: Navigate to the ‘Business Loan’ tab on the homepage.
  • Step 2: Check the ‘Eligibility Criteria’.
  • Step 3: Click on the ‘Apply Now’ button and proceed to fill in the necessary details before submitting your application.

To Conclude

The impact of GST on a Business Loan is a long-drawn subject that holds immense importance for all kinds of enterprises. While the cost of borrowing has increased, business owners have experienced many relaxations as well under the new tax regime. Thus, by understanding the impact of GST on Business Loan interest rates and applicable fees, business owners can make an informed decision when applying for a loan for business growth.

Frequently Asked Questions

  • What is the impact of GST on working capital loans?

As GST is connected directly with a business’ working capital, it may affect the liquidity of your business.

  • How do I calculate GST on a loan?

The GST amount fluctuates based on the actual processing fee of the respective loan offer. For instance, if a business avails of a loan of Rs.1 Lakh at a 4% processing fee, then the payable GST would be Rs.720. This figure is 18% of the processing fee, which in this case is Rs.4,000.

  • On what basis are GST loans provided? 

Lenders disburse a GST Business Loan based on the firm’s GST returns. Therefore, both self-employed individuals and non-professional service providers and retailers can apply for these loans



We take utmost care to provide information based on internal data and reliable sources. However, this article and associated web pages provide generic information for reference purposes only. Readers must make an informed decision by reviewing the products offered and the terms and conditions. Business Loan disbursal is at the sole discretion of Poonawalla Fincorp.
*Terms and Conditions apply

poonawalla fincorp team

Poonawalla Fincorp Team

Our team of expert writers and editors are passionate about providing authentic and valuable information on finance. Our aim is to simplify financial and finance-related concepts. We strive to help our readers become more aware and empowered to make informed financial decisions.

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