Air travel, mobile services, movies, eating out and luxury cars will get costlier from Wednesday when two levies announced in the Budget kicks in.
From June 1, service tax will be charged at 15% as the krishi kalyan cess of 0.5% comes into force.
Similarly, a “luxury tax” of 1% cars will be imposed on cars priced above Rs 10 lakh and services valued at above Rs 2 lakh.
A hike in the tax will push up retail prices of almost all everyday products, and services such as air travel, restaurant meals, movie tickets, telecom and DTH services and credit card, electricity and mobile bills.
Millions of middle-class families that spend nearly half their monthly budget on services will feel the pinch, as almost all services -- barring a small negative list -- are taxed. This is the third such hike since February 2015.
In the 2015-16 Budget, finance minister Arun Jaitley raised service tax from 12.36% to 14%. The Swachh Bharat cess of 0.5% came into effect in November. Add to it, the krishi kalyan cess and service tax will increase to 15%.
The revenues collected through the krishi cess “would be exclusively used for financing initiatives relating to improvement of agriculture and welfare of farmers”, Jaitley had said.
The luxury tax is part of the government’s strategy to clamp down on cash transactions. The tax will be collected by the car seller and will be applicable on the ex-showroom price.
It will likely push up prices of sedans such as Toyota Corolla Altis, Honda Accord, Skoda Superb, Volkswagen Jetta, M&M’s XUV 500, Hyundai’s Elantra and the recently launched top-end version of Maruti Suzuki’s Grand Vitara Brezza among others. Similarly, services such as tent houses, catering, estate management and hospital could cost more.
The minister had said the aim of the tax was “to reduce the quantum of cash transaction in sale of any goods and services and for curbing the flow of unaccounted money in the trading system”.
“… it provides data to the tax authorities to identify the persons who incur such expenditure, but may be missing from the tax base, bringing high-value transactions within the tax net,” Jaitley had said while presenting the Budget in February.
These levies, particularly a higher service tax rate, could push up inflation rates. India’s retail inflation rose to 5.39% in April, snapping a three-month easing trend.
A high inflation rate will weaken the chances of an interest rate cut when the Reserve Bank of India reviews the monetary policy next week.
The consumer price index-based inflation rate, which the central bank tracks for interest-rate decisions, and acts as a proxy for changes in shop-end prices, is now inching towards the RBI’s short-term threshold of 6%.