Come June 1, the service tax will go up from an effective 12.36% now to 14%, as the government on Monday announced the start date for the hike proposed in the last Budget. The move, aimed at keeping pace with the budget target of a huge 25% increase in the collections from this indirect tax, would be reflected in the bills consumers pay to enjoy B2C services like telecom and internet services, air tickets, restaurant bills, etc.
In case of B2B services, given the sluggish consumption scenario, the service providers may largely opt not to pass on the extra tax burden to their industrial/business-sector consumers, analysts said. Though the last Budget also included an enabling provision for imposing a Swachh Bharat cess of up to 2% on the value of some to-be-identified taxable services, Monday’s order was silent on this.
The rise in service tax is also seen as an attempt to prepare the consumers for a heftier hike that is inevitable once this tax is subsumed in the proposed goods and services tax (GST). The revenue-neutral rate for GST was proposed by the Delhi-based think tank NFPIP at 27%, although tax experts and lately finance minister Arun Jaitley have vouched for a lower rate.
The current service tax rate is 12.36% including the education cess and secondary and higher education cess. These two imposts will be deemed to be subsumed in the new rate of 14%. The hike in excise duty rate from 12.26% to 12.5% came into effect on the Budget day itself.
The service tax, introduced in FY95, has since grown fast to become a major revenue head of the centre. Though pace of growth has moderated in recent years, this tax is now on par with excise and customs duty in its revenue-raising potential. While the tax net had got widened with inclusion of more items every year, the negative list approach adopted in 2012 kept only a few services, mainly of government utility nature, outside ambit of the tax.
From 2014, the negative list of services and service tax exemptions were further pruned to tax online and mobile advertising, radio taxis and clinical research on humans.
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