New Delhi, January 30: Setting up the stage for Goods and Services Tax, Finance Minister Arun Jaitley is expected to hike service tax rate to 16-18 per cent from the current 15 per cent in the Union Budget slated to be presented on February 1.
FM Jaitley had hiked service tax rate by 0.5 per cent to 15 per cent in his previous budget and this time it expected that he may raise the levy by at least one percentage point to 16 per cent.
Some tax experts believe that there could be different service tax rates of 12 per cent for basic services and higher 18 per cent for the rest.
The hike in service tax would raise the cost of flying, eating out, phone bills and a host of other services. The rise in service tax is an attempt to take the rates closer to the proposed tax slabs for GST.
A service tax at par with the proposed GST rate would dry the price shock that a consumer would face after GST is rolled out.
GST is envisaged as a revolutionary tax regime that would include central and state levies like excise duty, service tax and VAT and it is now expected to be rolled out from July 1. Earlier the deadline was April 1.
Currently the proposed tax slabs for the GST are 5, 12, 18 and 28 per cent respectively.
Post demonetisation, Indian economy has felt one of the greatest shocks in decades and supply chain, manufacturing and foreign investments have declined heavily in the last quarter. Besides, several industries such as textiles, fishing and many more have seen unprecedented shrinking.
In face of falling growth estimates for the country after noteban and upcoming elections in five states, it is expected the FM will try to present a populist budget. However to fund the sops, Jaitley would also be seeking revenue models.
Higher service tax for April-June will help the government garner more revenue to meet expenses on schemes and programmes it may be planning to contain the impact of demonetisation.
While service tax until now is a central levy, it will be equally split between the Centre and states under the new GST regime. Most services, except essential ones like primary healthcare and basic education, will be covered by GST.
Service tax was budgeted to provide Rs 2.31 lakh crore in 2016-17, more than 14 per cent of the Centre’s total tax revenues of Rs 16.30 lakh crore.
This will be the third time that Jaitley will raise service tax rate. Service tax from June 1, 2015 was hiked from 12.36 per cent to 14 per cent. A 0.5 per cent Swachh Bharat Cess was levied on all services, taking the total incidence of service tax to 14.5 per cent from November 15, 2015.
In the last Budget, he imposed a Krishi Kalyan Cess at the rate of 0.5 per cent on all taxable services to take the levy to 15 per cent.