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Are multiple service tax rates in the offing?
January, 19th 2017

For consumers like us, service tax is omnipresent, well quite literally. From eating-out to travelling to entertainment, almost every expense that one makes has an element of service tax in it.

While Budget 2016 had hiked the service tax by 0.5 per cent to 15 per cent, all eyes will be on Budget 2017 to see if there will be any further increase in it. Or, will the government wait for the Goods and Services Tax (GST) to kick in on July 1, 2017?

It will be interesting to witness whether the Centre raises the service tax rate from the existing 15 per cent by at least one percentage point to 16 per cent as a precursor to the GST rollout. This, however, seems unlikely as there could be multiple rates for the service tax applicable on different services.

For some services, the rate could be set lower at 12 per cent, while for most others it might settle at 18 per cent. Budgets, especially over the last two years, have given the indication that the service tax rate is slowly being increased to bring service tax closer to the expected GST rate of 18 per cent.


The GST Council had already agreed on a four-slab structure as 0, 5, 12, 18 and 28 per cent. The Council has, however, still not announced the schedule of goods and services under each slab rate. It remains to be seen whether all services are to be taxed at standard rate of 18 per cent or few of them will enjoy lower rate.

Will there be multiple service tax rates for consumers?
For the government, GST is planned as a revenue-neutral exercise, which means that the switchover to the new regime should not impact the government's overall tax revenues.

For the consumer, however, there might not be the same scenario. In November 2016, Revenue Secretary Hasmukh Adhia had said that a decision on the services bracket would be taken later, although it would most likely attract the standard rate of 18 per cent. He had, however, added that some services that enjoy higher abatement would be put in the lower tax slabs of 12 or 5 per cent, depending on their current overall tax incidence. The government officials at that time also indicated that "multiple rates had been decided keeping consumer interest in mind".

Service tax over the years
Budget 2016 had proposed to impose a cess, called the Krishi Kalyan Cess, @ 0.5 per cent on all taxable services. The new effective service tax, therefore, is settled at 15%. While presenting Budget 2015, the FM had increased the service tax rate from 12.36 to 14 per cent. This new rate of service tax @ 14 per cent was applicable from June 1, 2015. Moreover, from November 15, 2015, Swachh Bharat Cess @ 0.5 per cent also got applicable. Therefore, the effective rate of service tax is currently at 14.5 per cent with effect from November 15, 2015.

Service tax is a tax levied by the government on service providers on certain service transactions, but is actually borne by the customers. It is categorised under indirect tax and came into existence under the Finance Act, 1994.

The proceeds of Krishi Kalyan Cess would be exclusively used for financing initiatives relating to improvement of agriculture and welfare of farmers. The cess will come into force with effect on June 1, 2016. The Krishi Kalyan Cess shall be in addition to any cess or service tax leviable on such taxable services under Chapter V of the Finance Act, 1994, or under any other law for the time being in force.

Impact
Total tax collection in India (direct and indirect), currently stands at Rs 14.6 lakh crore, of which almost 34 per cent comprises indirect taxes, with Rs 2.8 lakh crore coming from excise and Rs 2.1 lakh crore from service tax. With the implementation of the GST, the entire indirect tax system in India (excise, state-level VAT, service tax) is expected to evolve.

According to an EY study, most services are likely to be costlier due to increase in tax rate. However, impact may not be as high as 3 per cent (from current service tax of 15 per cent) if service providers pass on savings due to higher tax credits.

Impact of service tax on inflation
According to Edelweiss Securities, the overall transition to GST will not have a significant impact on inflation. At present, according to Edelweiss, services-oriented components constitute about 25-30 per cent of the Consumer Price Index (CPI) basket, with a major share belonging to housing, transport and communication sector. Service tax is not imposed on certain (12 per cent of the CPI basket) services and these services are expected remain exempt under the GST regime. A hike in tax rate on services is unlikely to have any material direct impact on the CPI.

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