New Service Tax Rate Applicability

New Service Tax Rate Applicability

The effective service tax rate, if and when the Swacch Bharat Cess is introduced, will not exceed 14.28%. This should be good news for those who feared that the service tax rates could go up to 16% after the cess is imposed.

The cess may be imposed sometime after June, it is widely felt.

Experts clarified that since the FM had clearly mentioned `cess’ (which is a percentage of tax), so the approximate 2% cess would lead to a maximum 0.28% increase in the service tax rate.

The Swacch Bharat (clean India) campaign launched by prime minister Narendra Modi had been widely appreciated by everybody across the country. However, the announcement by finance minister Arun Jaitley of a provision of 2% Swacch Bharat cess has not met with similar applause.

The cess, is being seen as an additional blow, after the 2% increase in service tax introduced in the budget for 2015-16. While the pre-budget service tax rate stands at 12%, the effective rate works out to 12.36% due to the 3% education and health cess.

In the budget, the FM increased the service tax from 12.36% to 14%. Besides, he also announced that he was enabling a provision to impose a Swacch Bharat Cess of up to 2% of the taxable services if more funds were required for the campaign.

This led to fears that the service tax would go up from 14 to 16% among the general public. However, Anil Chopra, Group CEO and Director, Bajaj Capital, says that these fears are unfounded. “As it is a `cess’, if introduced, it will lead to an effective service tax rate of 14.28%,” he points out.

The increase in service tax rates has not been appreciated by the general public as it would make most services expensive. “The service tax is applicable on almost everything from telephone bills to eating out to parlour services too. Everyday you end up paying service tax in at least three to four places,” adds Chopra.

Chartered accountant Arvind Rao feels that household budgets would definitely take a hit with the higher service tax. “The benefits of the higher slab rates announced in the interim budget last year will be nullified to some extent as many services will become expensive,” he says.

Meanwhile, insurance players are planning to make representations to the governmentasking for a level playing field. This is because the FM announced an increase in deduction of Rs 50,000 towards National Pension Scheme (NPS) under Section 80CCD.

While the government’s agenda to encourage long-term savings is widely appreciated, it is felt that the additional limit for pension plans should have included all pension products including those offered by other private players like life insurers, etc to provide a level-playing field.

“Given the distribution strength of life insurance companies, we would be able to tap a larger segment of the population and much faster too,” says Aalok Bhan, director and head product solutions management, Max Life Insurance. He is confident that once the representations are made to the government, then the anomaly will be corrected.