Understanding the Recent Hike in Service Tax:
The Finance Minister, Mr. Arun Jaitley, had brought in a proposal during the Union Budget 2016 to impose the Krishi Kalyan Cess on all taxable services. The recommended amount was at the rate of 0.5%, which would put the effective service tax rate at 15%.
During the 2015 budget, the Finance Minister had incremented the service tax rate from 12.36% to 14%, which had been applicable from June 1, 2015. Further, from November 15th, 2015, an additional Swachh Bharat Cess got added at the rate of 0.5%, which left the service tax at 14.5%. After the new proposal brought in during the 2016 Union Budget, the applicable service tax from June 1, 2016 will be 15%.
How will the Krishi Kalyan Cess be distributed?
A service tax is collected by the Central Government from service providers for offering certain types of products and services. When a customer makes a transaction which includes a service tax of 15%, where Krishi Kalyan Cess amount would be directed to the Consolidated Fund of India. The Central Government will be able to use these funds collected for particular purposes like financing agricultural activities and for the general welfare of the farmers. Funds collected under the Krishi Kalyan Cess will not be utilised for any other purposes.
The Krishi Kalyan Cess will be imposed on taxable services along with other service tax or cess as per the Chapter V of the Finance Act, 1994.
Impact of the Service Tax Hike:
With the implementation of the service tax hike, consumers would see a noticeable increase in their bill amounts when they purchase electronic equipment, AC railway tickets, cars, houses and movie tickets. Banking transactions, phone bills, internet bills, credit card bills, dining bills and health care services will become costlier with the imposition of the new tax.
Manufacturers will be able to find some reprieve from the Krishi Kalyan Cess as it will be slightly lower for them. They will have rebates for cess paid on goods that are imported.
Goods and services purchased for any value more than Rs. 2 lakhs would attract a 1% tax at source. This does not include jewellery purchases. Cars costing above Rs. 10 lakhs would also carry a luxury tax of 1%.
What’s in store for Indian consumers?
The Parliament would be passing the Goods & Service Tax (GST) during the Monsoon session later this year. The recent service tax hike might be effective for a short time period as it is expected that the Goods & Service Tax (GST) will increase to 17% - 18%. This could be levied uniformly across service providers in the country, thereby replacing all other tax forms.