Indian Tax Solution

Demonetisation may be the trigger for any increase in service tax rate this budget

Demonetisation may be the trigger for any increase in service tax rate this budget

New Delhi: Demonetisation may be one of the reasons for the government to consider an increase in the service tax rate. Reports suggest that till the Goods and Services Tax (GST) does not come into effect, the government could consider increasing the service tax rate from the current 15 percent to near 18 percent, one of the slabs proposed under GST. And that such a proposal could be mooted in the upcoming Union Budget. After a meeting of the GST Council yesterday, Finance Minister Arun Jaitley set the GST rollout deadline by 1 July this year, a delay of three months from the earlier April one deadline.

Taxation experts have slammed any move to hike the service tax rate just months before GST comes into effect, saying industry will need to change its systems and the transition process itself will take months. Already, tour operators have been hit by the service tax notice. From the end of this month, tour operators will have to pay a service tax on 60 percent of the amount they bill the customer, according to a government notification.Earlier, tour operators offering a package tour had to pay service tax on 25 percent of the bill amount, on 10 percent of the bill amount if the tour operator only arranged or booked accommodation for a person in relation to a tour, and on 40 percent of the bill amount if any other tour-related services were offered.

This piece explains why hiking the levy on tour operators will severely impact this industry.

Taxation experts also say that perhaps the move to hike the service tax rate in the Budget stems from the realization that there could be lower tax collections in the January-March quarter due to demonetization. An increase from 15 percent rate at present to 18 percent effectively means a 20 percent hike in the levy.Service tax is levied by the government on nearly all the services except the ones on the 'negative list' prepared by the government. Service providers collect this levy from customers and pass it on to the government. Whether you take the services of a tour operator, eat out at a restaurant, travel by air, pay a mobile bill - service tax is a component of the total bill in each case. There are some services which are exempt from tax, including those provided by the government or local authorities. The effective service tax rate currently stands at 15 percent, which includes 0.5 percent each of Krishi Kalyan cess and Swachch Bharat cess.

Bipin Sapra, Tax Partner at EY, wondered why the abatement for tour operators had to be altered so close to the GST deadline. I hope better sense would prevail and the government will not hike service tax rate in the Budget, since this means industry will have to change systems just ahead of the GST. Service sector is among the last priorities of people to spend money when cash is in short supply.

It is important to note here that for the first three quarters of the current fiscal, indirect tax collections have seen healthy growth year on year. According to finance ministry data, net tax collection on account of service tax during April-December 2016 stood at Rs 1.83 lakh crore against Rs.1.48 lakh crore during the corresponding period in the previous financial year, thereby registering a growth of 23.9 percent. During December 2016, growth collection of service tax was 12.4 percent.This piece quotes sources to say a higher service tax rate would also help the Centre raise additional revenue. For whatever part of the fiscal that the GST is not implemented, a higher service tax rate will increase tax collections while paving the way for GST, said the source. Tax experts said such a move, while possible, would require the government to notify the increase in service tax rates immediately, like in the case of central excise and customs duty.


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