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Service tax cut will increase money in hand
February, 25th 2009

The government, it seems, is trying to put some money back into your pockets. This, of course, is to enhance your purchasing power. Be it your credit card, telephone bill, insurance premium and mutual fund units among other things, you would save around 2% of the service tax you would have paid otherwise. The government on Tuesday has reduced service tax by 2% to 10% (exclusive of the surcharge).

You have to pay service tax on almost all services - except for a few like legal and medical services. So, a reduction in the tax rate would mean that you would save a little on taxes, says Gaurav Mashruwala, a certified financial planner. "One may not be saving much but what is more important is the government's effort to put money in people's hands so that they would spend more. This would obviously have an impact on the overall economy,'' says Devendra Nevgi, CEO and CIO with Quantum Mutual Fund.

The 2% saving may not look much if you take it in isolation. But together with your mutual fund investment, insurance premium, banking transactions, commission to travel agent, and so on, you can hope to save a decent sum. "The rate cut wont have a major impact, but whatever service taxes a fund pay - say, to custodian, agents, advertisement and marketing - will come down marginally,'' says Nevgi.

Though minimal, the cut in service tax will also benefit mutual fund investors. All fund houses charge investors what is called AMC fee - an annual fee for managing their funds. "Usually in equity funds, the average AMC fee is 2.25-2.50%. All fund houses pay service tax to the government on the AMC fee they charge. With a cut in the service tax, a slightly lower AMC fee will be charged to the investors,'' said Sandeep Dasgupta, CEO, Bharti AXA MF.

The returns from your insurance policies will also get a boost thanks to the reduction in service tax. The 2% cut is good for insurance customers. Insurance companies will pay 2% less on premium allocation and administrative charges. "This will enhance the IRR (internal rate of return) from the investment for investors,'' says an official with ICICI Prudential Life Insurance.

Those of you who have the habit of revolving credit on the credit card can also save a bit. This is because almost all services offered by banks attract service taxes. Though everyone has noticed the service levied on credit card outstanding, other heads where the tax is applicable are not known. "The list is huge be it average quarterly balance, return of cheque, demand draft, time transactions - all these activities attract service charges,'' says an official with Axis Bank.

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