Banking services, mutual funds, insurance, foreign exchange and others will be affected
Apart from mobile phone and restaurant bills, cost of financial products, too, will go up marginally due to the increase in effective service tax rate from 12.36% to 14%. The Finance Bill states: “In the new service tax rate the education cess and secondary and higher education cess will be subsumed in the revised rate of service tax. Hence, the effective increase in service tax rate will be from existing rate of 12.36% (inclusive of cesses) to 14%."
The new service tax rate will come into effect from a date to be notified by the central government after the enactment of the Finance Bill, 2015. Till the time the revised rate comes into effect, the levy of education cess and secondary and higher education cess will continue to be levied in service tax.
The budget also spoke about Swachh Bharat cess. The Finance Bill states: “An enabling provision is being made to empower the central government to impose a Swachh Bharat cess on all or any of the taxable services at a rate of 2% of the value of such taxable services with the objective of financing and promoting Swachh Bharat initiatives." Inclusion of this cess will further increase your cost. “The government indicated a Swachh Bharat cess of another 2% on services to be notified. This will result in the effective service tax rate of 16% when notified," said Rakesh Nangia, chartered accountant and managing partner, Nangia & Co.
Let’s take a look at what would be the effect of the increase in service tax on financial products and services.
As per government guidelines, a bank is liable to pay service tax on all income other than income from loans and advances. Since banking products fall under the service tax net, the cost of some of the services that you use will go up marginally.
Some banks include the service tax in the charges that they levy while others charge service tax on the fees and charges. For instance, cost of services such as loan processing and ATM is set to go up marginally. Usually, banks charge 20 plus applicable service tax. That amount will go up from 12.36% to 14%.
“Pricing has been under pressure for banks and they have been dependent on retail consumers. Some may pass on the service tax to consumers while some will absorb it. It will also depend on how fees and charges are structured," said Abhishek Bhattacharya, associate director financial institutions, India Rating & Research Pvt. Ltd.
Like banking products, your life as well as health insurance products, too, attract service tax. However, the way it is calculated differs across plans. For instance, health insurance and term insurance plans will attract 14% service tax (from 12.36% now). But, in case of traditional plans, composite tax will be applicable. “There has been a corresponding increase in composition rate for life insurance service. For instance, life insurance services will attract a composite service tax rate of 3.5% of premium in first year and 1.75% premium in subsequent years. Currently, it is 3% for first year and 1.5% for subsequent years," said Nangia.
Does it mean that the premium amount will go up? Yes, as “you will see a direct increase in the cost for premium that you pay for your health and life insurance. However, the impact will be marginal," said Kapil Mehta, managing director, SecureNow Insurance Broker Pvt. Ltd.
The distribution of mutual fund (MF) will also attract service tax. “The earlier exemption for agents or distributors has been withdrawn and will be chargeable under reverse charge provisions. Hence, these services will be taxable in the hand of asset management companies (AMCs)," said Sachin Menon, chief operating officer-tax and head of indirect tax at KPMG.
MF investors will not be affected, but distributors will be. “Since the government is going to use reverse charge provision, though the tax will be paid by the AMC, the distributors will have to absorb the cost in the commission. For instance, for every 100 that a distributor received as commission, 14 will be deducted by the AMC. This comes at a time when there is talk about capping the upfront commission," said Srikanth Meenakshi, founder, Fundsindia.com.
Fund houses agree that distributors will take a hit. “We are still discussing how this will flow, but if the service tax is levied for MF distributors, going by past experience, it is likely to be included in trail commission itself. This will hurt distribution margins, given that there is a proposal to cap distributor commissions," said the chief executive officer of an AMC.
Foreign exchange (forex) attracts service tax, and the increased rates will affect consumers. The service tax on forex is calculated on a composite basis. “There will be a corresponding increase in services of buying and selling of foreign exchange including money changing. The composite service tax on gross money exchanged up to 1 lakh will be 0.14% up to a maximum of 35. Gross amount exchanged from 1 lakh up to 10 lakh will have a composite service tax rate of 140 plus 0.07% of the money exchanged. For gross amounts above 10 lakh, the composite service tax rate will be 770 plus 0.014% of amount exchanged but up to a maximum of 7,000," said Nangia. At present, for gross amount up to 1 lakh, it is 0.12% up to a maximum of 30.
The change in service tax rates will affect investors as well as distributors. As of now, the Swachh Bharat cess has not been included. In case this comes into effect and is applied on financial services as well, the overall cost will only go up further, though marginally.
The changes are not applicable immediately but only once the Finance Bill is passed, and the effective date is communicated, which is likely to be 1 April 2015.