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Post GST, Modi government to cushion impact of hike in service tax
September, 16th 2016

The government will try and cushion the impact of the goods and service tax (GST) on services in case of an increase in the levy after the implementation of the tax reform measure, government sources said.

The government currently imposes a service tax of 14.5% but the GST rate is expected to be higher with states such as Kerala seeking a rate of over 20% to ensure that they do not lose revenue in the new tax regime. A committee under chief economic adviser Arvind Subramanian had recommended a rate of around 18%."The GST council will look into various options to reduce the impact on several sectors. We are working on various parameters," said a senior finance ministry official, who did not wish to be identified.

"We will give our inputs and the various scenarios under GST. It is a political call which has to be taken," the official said. Sources said in the run up to the general election in 2019, the government will be wary of any adverse impact of a sharp spike in prices and will therefore take measures to shield consumers in case of an increase in the service tax rate.

While discussion on the levy will begin in the GST Council, sources indicated that the government will try and ensure that crucial services such as life or medical insurance may not see a significant increase in the overall burden on consumers.

This can be done through abatement, where only a part of the service is taxed. For instance, in case of restaurant bills the levy works out to around 5.7% due to abatement. The sources said the levy on restaurant bill will be reviewed as the higher abatement for the service is due to the argument that several food products face excise duty , which is factored in currently .With these food products coming under GST along with the service provided by restaurants, the burden on the consumer may not rise significantly .

Effort will also be made to minimize the impact of GST on under construction houses and the government may provide for abatement for land and other commodities used for construction. The problem arises as no abatement is allowed in lieu of land and other commodities such as steel, cement and sand used for the construction.

In contrast, there may not be acushion for services such as telecom, which will impact your mobile bill. " Abatement may continue for some consumers facing services where it is impossible to segregate value of services and goods such as restaurants where combined impact of the GST rate is much higher than present tax rate under VAT and service tax," said M S Mani, senior director at consultancy firm Delloite Deloitte Haskins & Sells LLP .

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