The Goods and Services Tax (GST), the biggest tax reform since India's independence, has announced the tax rates for different goods and services. We pay service tax on various services availed from banks, mutual fund and insurance companies.

Service tax is an indirect tax and the Central Board of Excise and Customs (CBEC) is responsible for the formulation of policies related to levying and collecting indirect taxes. While the government has finalised the rate of GST applicable on financial services, the CBEC is yet to come out with a clarification and exemptions list.

Service tax is currently levied at the rate of 15 per cent (including 0.5 per cent Krishi Kalyan cess and 0.5 per cent Swachh Bharat Cess) on most financial services. Under the GST regime, financial services will be the 18 per cent tax bracket. What this means is that you will have to spend marginally higher to avail these services.

MUTUAL FUNDS
A mutual fund house offers portfolio management services to investors. For this, it charges a management fee. On the management fee, which is a part of the total expense ratio (TER) of the fund, a service tax at the rate of 15 per cent is levied currently; this will go up to 18 per cent after GST is implemented. SEBI, the capital market regulator, has allowed mutual funds to charge service tax over and above TER.

There is a cap of 2.5 per cent on the expense ratio of an equity mutual fund scheme. Therefore, if the asset management company (AMC) charges a management fee of one per cent and remaining 1.5 per cent goes towards other fees such as trustee fee, registrar fee, banking fee, custodian fee, marketing fee, commission, etc, then as per the current scenario, the expense ratio of the scheme will be 2.65 per cent - 1.5% + 1 multiplied by (1+15%). After GST, it will go up to 2.68 per cent.

BANKING SERVICES
A bank charges service tax on most transactions - online money transfers or withdrawals from ATMs beyond specified limits. With GST, these services will now attract a tax of 18 per cent instead of 15 per cent service tax, charged currently.

For instance, if you withdraw from another bank's ATM after exceeding the free transaction limit, you are charged Rs 20 plus service tax which comes to around Rs 23; post GST, this will go up to Rs 23.60. However, experts are hopeful that the increase in cost may not last in the long run as banks will pass on the benefit of input tax credit, under GST, to their customers. "Services such as FDs and bank account deposits that do not have an associated charge currently will continue to remain outside the GST net. The final list of exemptions from the flat 18 per cent tax rate is still awaited," says Adhil Shetty, CEO and Co-founder, Bankbazaar.com.

INSURANCE

When it comes to insurance, a service tax is levied on risk premium. In cases of term, motor and health insurance, the entire premium is considered as risk premium; therefore, service tax is levied on the entire premium paid.
In theory, this could mean an increase of 3 per cent in premium from the existing applicable premium, effective from July 1, 2017, across life, health and general insurance. However, some of this should be offset if tax on services availed by the industry are allowed to be taken into account to decrease insurers' tax paid.

Vighnesh Shahane, CEO, IDBI Federal Life Insurance, explains this further: "If the premium of the term insurance policy is Rs 20,000 (including taxes), you will have to pay Rs 600 more (3 per cent more) after July 1. However, we may be entitled to an additional credit against taxes that have been subsumed under GST. However, whether premiums fall over time still remains to be seen."

"In case of ULIPs, the following charges are liable for service tax (including SBC & KKC) at the rate of 15 per cent - surrender charges, fund management charges, policy administration charges, switching charges, mortality charges and allocation charges," says Miranjit Mukerjee, CFO, Future Generali India Life Insurance.