Finance minister Pranab Mukherjee raised the service tax rate by two percentage points, bringing all kinds of services under the tax net with an exception of 17 services that will continue to remain outside the ambit of service tax.
Even as the government expects to garner additional revenue of Rs 18,660 crore from the service tax hike in the next fiscal, it will have inflationary touch and push up prices. The rate hike will jack up mobile phone bill, increase air fare and rail travel rates. Eating out in the restaurants will turn costly and premium for insurance policies will also rise.
"…to maintain a healthy fiscal situation, I propose to raise the service tax rate from 10% to 12 %, with consequent changes in rates for service that have individual tax rates," Mukherjee said.
Earlier in his speech the finance minister while providing a rationale for the tax hike said, "At the end of June this year, this tax (service tax) will attain adulthood by completing 18 years. It is therefore time to shift gears and accelerate ahead."
With services accounting for 59% share of India's GDP, the service tax has become major revenue grosser for the government. The minister emphasised on the need to widen service tax base as its share in taxes was far below its potential. Mukherjee said that the tax and central excise need to be brought "as close as possible in the light of our eventual goal of transition to Goods and Services Tax."
Global consultancy Deloitte said life insurance premium of unit-linked policies having a mix of allocation towards risk and investments that were earlier subject to service tax at the rate of 1.5% would now have a service tax of 3% for the first year and 1.5% for the second year premium.
Telecom companies too expressed displeasure with the service tax hike and said the hike would be passed on to the consumers, thereby leading to a hike in the mobile phone bills. "The telecom sector is already burdened with multiple and high tax levies, which account for 30% of the telecom services revenue. The rise in service tax from 10% to 12% will increase cost of services to customers…this will certainly have a further impact on the consumer," said Sanjay Kapoor, CEO, Bharti Airtel (India & South Asia)
Mukherjee proposed to have a negative list of services that would not be taxed. "The list comprises 17 heads and has been carefully drawn up keeping in view the federal nature of our polity, the best international practices and our socio-economic requirements".
The list includes pre-school and school education, renting of residential units, entertainment and amusement services, public transport. A few other exemptions allowed by the minister include healthcare, services rendered by sportspersons, performing artists in folk and classical arts etc. He also raised the exemption for monthly maintenance charges payable by a resident to the housing society from Rs 3,000 to Rs 5,000.