MARCH 07, 2015

By Madhur Harlalka B. Com., FCA, LL.B

THE Honourable Finance Minister delivered his first full-fledged budget on Feb 28, 2015. This has been one of the most keenly awaited budgets in recent times and both the industry and common man had very high expectations from the budget.

As part of the tax proposals in the budget, the Finance Minister has announced increase in the rate of service tax from the present 12.36% to 14%. This increase in service tax rate will be applicable from a notified date. There is a further proposal to levy Swachh Bharat Cess of 2% on value of services should the need arise in future. Thus we could be looking at a potential rate of 16% for services. Notwithstanding the Swachh Bharat cess, the increase in the rate to 14% itself is not justified. The reasons given by the Government is that since GST will come in April 2016 and the GST revenue neutral rate is expected to be anywhere between 22%-27% (with the current excise and state VAT rates of 12.5% plus 14%) , the Government wants the public to get used to services being taxed at the higher rate.

There is no logic in increasing the service tax rate today just because we are likely to have services being taxed at a higher rate in the future. It throws up an immediate cost for a benefit which may arise only in future. It seems to be an attempt to garner revenue by the Government in the garb of a future GST. Although the Government's intention is quite clear and sincere for introduction of GST, once can never say with surety in what form will the GST come and when it will come. This is due to diverse interest groups involved and also due to ground level implementation challenges involved in the introduction of GST. Hence, the reasoning for service tax increase does not sound convincing.

Look at it; the current rate of service tax of 12.36% itself was perceived as high and inflationary. Further, due to rate hike across the board on all services, all the day to day services consumed will become more expensive. Few examples are: medical, education, apartment maintenance, dining out, movies, shows, entertainment,office renting, etc. This is coupled with marginal increase in excise duty rate from 12.36% to 12.5% in the current budget.

As if the rate increase was not enough, this is the budget that has brought maximum activities under the tax net. Following is the list:

•  Job work services for manufacture of alcohol;

•  Entertainment services such as sports, award functions, etc.

•  Amusement services such as theme parks and amusement parks;

•  Chit fund foreman services;

•  Lottery agency and marketing services;

•  Mutual fund agent or distributorship of mutual fund;

•  All services rendered by Government to a business entity except when they are exempt;

•  Construction of buildings and employee residential quarters for Government;

•  Construction of airport and ports;

•  Aggregator services in e-commerce sectors such as taxi bookings, bus bookings, etc.

•  Public telephone services;

•  Increasing taxable portion for GTA services from 25 to 30%;

•  Increase in taxable portion for air travel;

•  Increase in reverse charge tax component on manpower supply services;

•  Inclusion of out of pocket expenses as part of service consideration.

The sweep of the above additional services is quite large and taxing some of the above services could be a subject matter of legal challenge. Though few exemptions have been given, they are very specific and do not really pertain to services regularly used.

Notwithstanding the penalty and CENVAT credit rationalisation measures, the service tax rate hike will lead to an overall increase in cost of services which was never expected from this budget. The service tax proposals are a dampener of sorts in the endeavour of the Government to undertake reforms with some bold policy announcements.

(The author is Partner, Rishi Madhur & Co., Chartered Accountants, Bengaluru.)