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Economy

You Thought Service Tax Was Hiked to 14%? It Might Be 16%.

Service Tax in Budget 2015 was moved to 14% from the 12.36% we were paying earlier. But there’s a sneaky thing in the budget that allows them to push it up to 16% whenever they want. From the memorandum:

Swachh Bharat Cess:

  • An enabling provision is being made to empower the Central Government to impose a Swachh Bharat Cess on all or any of the taxable services at a rate of 2% of the value of such taxable services with the objective of financing and promoting Swachh Bharat initiatives. This Cess shall be levied from a date to be notified by the Central Government in this regard and will not have immediate effect.

The only thing this is going to clean is your pocket.

Service Tax applies to a lot of things that you can hardly avoid. You have any banking fees of any sort? You pay service tax.

You take a personal loan? Pay service tax on the interest. That 12% personal loan just became something like 13.92%.  Apparently most personal loans don’t charge service tax on the interest, only some credit cards do. So loans are safe, for now.

There’s service tax on insurance premiums (term insurance part).

There’s a service tax component in air tickets, in restaurant bills, and others. All of which will go up.

If you buy services from anywhere, from haircuts to financial planning to chartered accountants to outsourced software from Indian companies, you will find that you have to pay higher and much higher this year. The prices of everything in the service end will go up, but it won’t really be visible in inflation indexes because they don’t consider prices AFTER service tax was applied. So yes, great days on paper indeed.

This budget has been a tremendous exercise in image management. Hats off to whoever has pulled the PR strings, because on any other day, this kind of thing would cause extensive outrage. 16% service tax, beat that!

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  • Phoenix says:

    Good catch Deepak.
    This is real abuse of honest salary earner who has TDS. WE ARE GETTING SCREWED FROM ALL SIDES.

  • Kaushik says:

    I am going to lessen the consumption. Beat that.

    • DJ says:

      Exactly why raising taxes does not lead to increased govt revenue and instead slows growth.
      Even a 5 year old can understand this, but a govt of thousands of politicians and IAS and economist PhDs cannot figure this out. Amazing isn’t it?

  • kumar says:

    we’ll never know the correct number.
    I have been reduced to a choice of : can i use this service, or live without it?
    i have dropped out of many things, restaurants being one of them. Imagine paying 30% of your bill as taxes and tips. better not to eat.
    Next step : can i afford to eat daily, or should i eat once in two days? Maybe the yoga master will teach me how to live on air, as polluted as it is?
    It is beginning to make less and less sense to me.
    Do we really need 1500 models of phones in one year for this nation?

  • Vineet says:

    Not related to the topic…there is a govt announcement that non government PF’s will have to invest 5-15% of their corpus in equity markets. The news is there on Moneycontrol. You think this is big for equity markets ?

    • Wow. THis is interesting. How big are non govt PFs?

      • Vineet says:

        I found a link here http://www.moneycontrol.com/news/others/private-provident-fund-trusts-issueschallenges_575616.html which says that the size is around 1lac Cr. (It’s from 2011 so I am assuming that it’s bigger now)
        At 5% it would make it around 5k Cr

      • piyush says:

        Private Trusts essentially means PF money doesn’t go to get managed by EPFO, the goes to company managed trust who mostly give it to third party private fund managers to manage (mostly the same guys who manage NPS – reliance, icici, asset management companies). Its decently big, because a lot of companies find having their own trust makes things easier than having to deal with EPFO, plus provides better processes for their employees.
        Till now the asset allocation prescribed was the same as for EPFO. Govt has been trying to push EPFO to have a minimum % earmarked for equities which has been seeing resistance for a long time. They have now provided the flexibility to pvt trusts if they want equity exposure to be between 5-15%. Great idea. I know my PF money gonna lie there for 10/20/30 years. I definitely want to have some portion in equities. Till now govt forced me to invest large chunk of my income with EPFO, forced me to invest it in Gsecs, giving me poor returns.
        I work in a corporate treasury. Last year we had evaluated setting up our own pvt trust, but with asset allocation freedom not present, it was not a meaningful exercise. Now with some flexibility on asset allocation, we will reevaluate and hopefully move to our own trust. I did some research, a combination of constant asset allocation with regular rebalancing with 30% in top quartile equity funds and 70% in top quartile debt funds has generated 18% CAGR over the past 17 years. Will publish a post on this and share link soon.
        Its a misfortune of millions of workers in India that their unions force their savings to be invested in bonds in the name of safety, while not letting the workers benefit from the profits of the same companies they work for.

  • Amit says:

    As much as people may want to outrage, raising the service tax rate is a very bold step and one in the right direction. Once GST comes in, services in the country will become expensive. I have been saying this for a while now, that at a rate of say 20% GST, insurance premium etc will sky rocket. The reason why GST may not bring down cost of services is because most of them use limited amount of input services and also use limited material (to offset cenvat ). Of course what we dont realise (since we dont see it, because its included in MRP) is the fact that goods normally suffer a tax of 18-25% (Cenvat + CST + VAT), and hence hardly ever outrage over increase in VAT and excise duty rates !!
    An increase in Service tax now is the path to staggering the impact of increase in cost of services. The next round of increase would have to be offset by lowering of rates on products I suppose, so wait till GST comes in.

  • observer says:

    Odd that you mention 2% CESS will increase service tax to 16% from 14%. Cess if and when applicable will be ON 14%. this means when bess is notified, will result net service tax to 14.28% and NOT 16%.