MUMBAI : Following weak growth in May, business activity in India’s services sector contracted in June. The seasonally adjusted Nikkei India Services Business Activity Index, released by IHS Markit, fell to a one-year low of 49.6 in June, from 50.2 in May. A figure above 50 indicates expansion, while a reading below that signals a contraction. This is the first time the index has hinted at a contraction in services businesses since May 2018.

Sub-sector data highlighted that real estate and business services was the weakest link in June, where a marked drop in new work translated into faster contraction in output, and unchanged employment. At the same time, consumer services recorded the first drop in business activity in one year.

Survey participants blamed weak sales, competitive pressures and unfavourable taxation for the dismal output. Consequently, business optimism among service providers for the next 12 months declined.

According to Pollyanna de Lima, principal economist at IHS Markit: “It’s somewhat surprising to see some companies linking subdued demand to high tax rates, two years on from the goods and services tax (GST) implementation, with the hotel tax mentioned in particular." With hotels, contrary to what was envisaged, there isn’t a flat GST rate at which hotel rooms are taxed. Rates depend on the room tariff charged per night.

It looks like the increased compliance cost in the GST era, coupled with the ongoing consumption slowdown, is weighing on service providers.

It should be noted that under GST, services are taxed at 18%, higher than the 15% levied earlier.

Also, service providers are required to get state-wise registration done for each state they operate, pushing compliance costs higher, especially for pan-India companies. In the earlier regime, a central registration was sufficient.

No wonder then that unlike their counterparts in the manufacturing sector, service providers have raised selling price in June to make up for the increased operating costs.

“Despite accelerating from May’s 28-month low, the overall rate of input cost inflation was negligible and below the average over the survey history. Still, the latest uptick in cost burdens was sufficient to drive another round of upward revisions to selling prices," said the survey report.

Meanwhile, companies in both the services and manufacturing sectors are hoping for some fiscal stimulus from the government, which would boost demand and translate into output growth.