Q] How will the GST impact the cost of insurance products, especially term and health insurance?
—Neha Upadhyay, Mumbai
The Goods and Services Tax (GST) Act is now a reality. It will replace all applicable indirect taxes. Under it, while some goods and services will get cheaper, some are set to get taxed more. The GST council has suggested an 18% tax rate for the financial services sector against the current rate of 15%, which would mean a direct impact on the premium paid by the policyholder. This means that if your term insurance policy premium is Rs 10,000 now, then you could have to shell out an additional Rs 300 under GST regime. Same will be the effect on your health insurance premium.
Traditional insurance savings plans or endowment plans, which currently attract a service tax of 3.75% on the premium in the first year of the policy, will be subject to a tax of 4.5% in the first year of the policy under the new tax regime. The second year onwards, the tax rate will rise to 2.25% from the current 1.88% service tax under the new GST act. Hence, in general, all insurance products will become slightly costlier.
Q] Is GST helping common person directly on cost saving for real estate investment by any chance? Because now people end up paying almost 12% as taxes & registration fees for under construction property... what will be the scenario now?
—Nupur Sharma, New Delhi
Unfortunately Nupur, the existing tax liabilities of homebuyers will remain largely unaffected after the introduction of the GST regime. GST Council has brought the real estate sector under the GST ambit partially through works contracts, which implies that they will be taxed at 12% under the GST regime. However, the solace will be in the manner in which the taxes are paid. Currently, a homebuyer has to pay several indirect taxes, to include excise duty, VAT and service tax, which amounts to a tax outgo of about 11%, excluding stamp duty, in general though it varies from state-to-state. Under the new regime, all the other indirect taxes will be subsumed and a buyer will have to pay a uniform 12% tax on the purchase of real estate, except stamp duty. This is true for under-construction properties but not on completed, ready-to-move-in apartments. On the other hand, excise duty and central sales tax on construction materials that are paid by developers, will be allowed as an input credit to them.
The government has cautioned the developers to pass on any benefits that they may avail under the new tax regime to the homebuyers. I must also bring out that there have been reports of developers currently asking buyers to make full or large payments before the new regime comes into force on July 1, saying GST would make properties costlier. This is just a ploy by them to get more money out of the buyers before it is actually due and has nothing to do with tax after GST imposition.
Q] I was allotted shares in the recent HUDCO IPO at the offer price of Rs 58. While the stock still quotes at a premium to the offer price it has slid significantly from highs of Rs 77. Given the changes in the real estate sector, is HUDCO a long-term bet? Kindly advise.
— Pradeep Ingale, Mumbai
In ICRA’s opinion, the housing finance sector will register a growth of around 18-20% in FY 2017-18, compared with the 5-year CAGR (Compounded Annual Growth Rate) of 18% over 2011 to 2016. The growth is likely to be supported by some pick-up in primary sales, new launches and a healthy growth in the affordable housing segment. The long-term growth outlook for the sector remains positive given the Government’s focus on ‘Housing for All’ by 2022, and the favourable regulatory environment.
Incorporated in 1970, Housing and Urban Development Corporation Ltd (HUDCO) is a wholly-owned Government company with more than 46 years of rich experience in providing loans for housing and urban infrastructure projects in India. HUDCO’s change in assets on year-on-year basis is seen in the range of 8-12%.
HUDCO is currently trading at around Rs 68 with a correction of around 13% from its highest level of Rs 77.85. Looking at the government’s focus on the sector as well as the projected growth of the company, the share price target goes to 3 digits in next 1-2 years. I don’t see it going below its initial lower price band of Rs 56 unless the market /sector sentiment turns grossly negative. You may certainly keep it as a good long-term bet.
Q] As the GST kicks off on July 1, how should I plan my expenses so that my personal investments remain unaffected? I plan to invest in 5 mutual fund SIPs in the next few months. How will the GST affect MF investments? Also, at current levels, is it safe to invest in direct equity?
— Suhas Bane, Mumbai
If we see objectively, GST is a mixed bag with some products and services becoming expensive and some cheap. What and how you consume goods and services will decide what happens to the money in your purse now. Nobody can say whether your expenses will increase or decrease and to what extent after implementing the GST unless a very comprehensive analysis of your spending pattern is done.
While some products and good will get taxed more, some are going to get cheaper. For example, the indirect tax rate on services is 15% currently while under GST this rate may go up to 18%, which may affect almost all the services that we consume. On the other hand, there is also a list of products that are termed 'essential' and will attract Zero GST. Household and personal care products will become cheaper under the upcoming regime. On the other hand, most of the services like mobile phone services, healthcare and transportation, which are currently charged at the rate of 15%, will cost more and attract 18% tax under the GST regime. The data also shows that food items will get cheaper as they will be taxed at 5% GST as against 12.5% tax currently. All-in-all, the GST is predicted to reduce the overall budget expenses of a normal middle-income household and is expected to impact your household in a positive way, by reducing the cost of the most basic goods, making more money available to you to invest.
Under the new regime, investing in mutual funds may cost investors slightly more, as the indirect cost of compliance for fund houses is likely to go up which may lead to increase in the expense ratio. The expense ratio is the measure of the cost incurred by an investment company to operate its mutual fund. The increase in service tax from 15% to 18% would also make mutual funds a tad expensive, if the distributors are able to pass on this additional expense to the end-users in some manner. But overall, implementation of GST will provide large positive effects to investments in the long run, thus making it a winning preposition for you.
Direct investment in stocks is safe only when you have the knowledge to analyze the markets and when you have the time to conduct their continuous monitoring. There is never a good and never a bad time for investments. We recommend if you understand markets well and are capable enough to select, track and monitor individual stocks, you can invest any time. If you feel you cannot do this, mutual funds anyway are good any time.
The expert is a Certified Financial Planner and a SEBI Registered Investment Advisor. He is CEO, Hum Fauji Initiatives.