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Budget widens service tax net

Budget widens service tax net
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First Published: Tue, Mar 01 2011. 12 13 AM IST
Updated: Tue, Mar 01 2011. 12 14 AM IST
The increasing contribution of the services sector to gross domestic product, and an effort to bridge the gap between the present service tax regime and the proposed goods and services tax have prompted Pranab Mukherjee to bring some more services under the service tax net. While the rate of service tax has been retained at 10%, new services have been added to the list of those to be taxed and the scope of existing service categories expanded or rationalized. The new services for which you will have to pay more are certain types of hotel accommodation, air-conditioned restaurants, healthcare services and air travel.
If you step into a hotel where the tariff is more than Rs1,000 a day or eat at an air-conditioned restaurant that has a licence to serve liquor, be ready to sign a bill that is higher. However, in a typical “one step forward and one sideways” move, there is a relief of 50% on the former. This means that the service tax will be levied on half the billed amount, effectively reducing the burden to 5% of the amount charged. Similarly, there is an abatement of 70% on restaurants that serve alcohol, reducing the service tax applicable to just 30% of the bill. Most of these establishments already bear a luxury tax imposed by the state governments, and hence, are likely to pass this additional burden to the consumer.
“Usually, all indirect taxes are passed on to the consumer and the taxes are recovered from them, so these also will most likely be,” said Saloni Roy, partner (indirect taxes) at audit and consulting firm Ernst and Young. “However, in the case of those goods or services where the increase is marginal, the producer could absorb the hike.”
The earlier service tax imposed on health check-ups and treatment has been replaced by a tax on all services, including those such as diagnostic tests provided by centrally air-conditioned hospitals with 25 beds or more. This also comes with an abatement of 50%, yet is likely to affect the common man the most.
“Of all the categories brought under the service tax purview, this one may have the most impact and widest reach,” said Pratik Jain, executive director at audit and consulting firm KPMG India. “Today, most hospitals are air-conditioned and, even with the abatement of 50% on the bill, may be a significant amount.”
Apart from these, the service tax on economy class airfare has been increased by Rs50 to Rs150 on domestic sectors and by Rs250 to Rs750 for international travel. Domestic travel by business class or any other class higher than economy will attract a service tax of 10% on the value of the service provided by the airline, a steep increase from the earlier Rs100 per ticket.
A nominal 1% Central excise duty has also been imposed on 130 items, many of them consumer goods that were earlier exempt from certain indirect taxes.
• The basic exemption limit for very senior citizens (over 80 years) has been increased to Rs5 lakh —a welcome move.
• Long-term infra bonds get a boost as deduction of up to Rs20,000 in long-term infrastructure bonds is extended by 1 year.
Nikhil Bhatia, executive director, PricewaterhouseCoopers India
• It is disappointing that education cess stays and full alignment towards the proposed DTC slabs effective April 2012 has not happened.
• Extension of time limit for obtaining exemption approvals from Provident Fund Authority to 31 March 2012 brings relief.
Sonu Iyer, tax partner, Ernst and Young
• Foreigners have been allowed to invest in Indian stock markets. This will be a new source of money that will be deployed in our stock markets.
• Direct cash transfer to below poverty line beneficiaries of kerosene, LPG, etc. will put more money in the hands of the rural population.
Veer Sardesai, financial planner
• Distinctively, the budget against the backdrop of negative environment has been, first and foremost, a confidence booster.
• This was a three-year pending request from the banking system, that tax exemption on infra structure bonds should be granted.
Rana Kapoor, MD and CEO, Yes Bank
• The finance minister gave more clarity with regard to DTC which will come into effect from next year.
• There has been a lot of emphasis on infrastructure in the budget.
Motilal Oswal, CMD, Motilal Oswal Financial Services
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First Published: Tue, Mar 01 2011. 12 13 AM IST