Professional service providers have said the cut of 2% in service tax from 12% to 10% announced by finance minister Pranab Mukherjee on Tuesday will reduce the overall cost of business in India thus encouraging consumers to purchase more services.

Avneesh Raghuvanshi Partner of recruitment firm GKR Daulet Singh said, ?The impact would be significant as it would be provide relief to those who procure services.?

The 2% cut is significant when the fees are above Rs 1,00,000, which is the case in fees for most professional services. Arvind Pandit, director HayGroup says, ?Our professional fees are purely exclusive of service tax. There would be no difference from our perspective with regards to the reduction in service fees as we act just as a pass through medium wherein our clients pay service tax?.

But that is a practice that changes across companies. Grant Thornton in the consultancy space and MaFoi–head hunter firm however include service tax in their billing. GKR Daulet Singh, a head hunter firm for instance itself charges a fee exclusive of service tax to clients in 99% of cases but in rare cases when clients put up a tough negotiation the service tax is included in their fees.Currently in India 105 services are subject to service tax and recent businesses which have become subject to service tax during 2007 and 2008 include renting of immovable property, supply of tangible goods, commodity exchange, clearing houses and Information Technology businesses.

Incidentally the changes in service tax rate seem to be following a two-year pattern in the revenue department. The 12% rate was put in place in budget 2006. It was last increased to 10% as of September 2004 from 8% before that.

According to R.Muralidharan, Partner, Indirect Taxes at PricewaterhouseCoopers said, ?The reduction of service tax by government would be most beneficial to final consumers purchasing services such as telephone, catering, ticketing and credit card services?.

However industrial manufacturers such as steel producers who maybe using services such as chartered accountancy services will only avail a ?pass through? benefit.

Similarly, exporter of services such as BPO?s, KPO?s, call centres and commission agents based in India for parent companies overseas are not required to pay service tax and will only have a neutral advantage with regards to input services they may have procured such as security and lease line services.

However, retailers and shops in malls will benefit, as service tax that they pay on rentals will be reduced thus freeing up a little liquidity for them. This is so even though they are dealers of goods and not manufacturers or service providers?.