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Increase in service tax to bring it closer to GST
March, 04th 2016

The effective service tax will be 15% as the Budget imposed a Krishi Kalyan Cess of 0.5% on all taxable services. In last year’s Budget, the government increased the service tax rate from 12.36% to 14% and in November introduced Swachh Bharat Cess of 0.5%. Service tax is a tax levied by the government on service providers on certain service transactions and is paid by the individuals. The increase in effective service tax of 15%is to bring it closer to the expected goods and services tax (GST) rate of 17-18%.

Krishi Kalyan Cess: The Budget 2016-17 for the first time introduced a 0.5% Krishi Kalyan Cess on all services for the purposes of financing and promoting initiatives to improve agriculture. The Cess will come into force with effect from 1st June 2016.The government has projected to collect an aggregate of Rs 5,000 through this tax in the financial year 2016-17. The proceeds of the Krishi Kalyan Cess shall first be credited to the Consolidated Fund of India and the Central Government may, after due appropriation made by Parliament by law in this behalf, utilise such sums of money of the Krishi Kalyan Cess for such specified purposes.

Infrastructure cess: The Budget has levied infrastructure cess at the rate of 1% on small petrol, LPG, CNG cars, 2.5% on diesel cars not exceeding 4m in length and engine capacity of up to 1500cc. The cess on all other higher engine capacity vehicles (SUVs and bigger sedans) would be levied at the rate of 4 per cent. The proceeds of this cess will be used to fund pollution control and improve traffic movement across the country. The government has projected that it would collect Rs 3,000 crore through infrastructure cess in the next financial year. The infrastructure cess is set to impact the price of cars and they may see a price increase of up to Rs 50,000. Even as the Supreme Court has already imposed a ban on registration of diesel vehicles with engine capacity of over 2000 cc in Delhi, citing rise in pollution levels, now the government has decided impose infrastructure cess between 2.5% and 4%.

However, three wheelers, electrically-operated vehicles, hybrid vehicles, hydrogen vehicles based on fuel cell technology would be exempt from the Infrastructure Cess. Besides, motor vehicles which after clearance have been registered for use solely as taxi, ambulances, cars for physically handicapped persons will also be exempt from this cess.

Clean environment Cess: The government renamed the Clean Energy Cess to Clean Environment Cess and doubled the rate from Rs 200 to Rs 400 per tonne. The aluminium manufacturers’ power cost is expected to rise by 3% and spounge iron manufacturers’ total production cost is expected to expected to increase by 2-3%. The power industry fears that the proposal to increase rate of Clean Environment Cess will have adverse impact on tariff structure and it expect there will be an increase of about 12-13 paise per unit. India, the world’s third-largest emitter of greenhouse gases, is among the few countries in the world to introduce a carbon tax. The annual collection of the cess is likely to be substantial. As per the revised estimates, the central government had collected Rs 12,623 crore from the clean environment cess in 2015-16 and hopes to raise Rs 26,148 crore in 2016-17. The Oil Industries Development Cess will now be be levied at the rate of 20%, instead of specific rate of Rs 4,500 per metric tonne. The finance minister also abolished 13 cesses, levied by various ministries in which revenue collection is less than Rs 50 crore in a year.

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