Remember the service tax

ARis- Business line
“Sanjeev Lamba shares his insights on the Service Tax in India, published in The Hindu BusinessLine titled – Remember the service tax. Complete article given below”

Feature in – The Hindu BusinessLine

Visited the restaurant the other day and found yourself paying a lot more than you bargained for?

What you may have forgotten to take into account is the service tax, which can bump up the total quite a bit. Here’s explaining why your everyday bills get pricier because of service tax.

What’s taxed
Service tax is usually paid by the service provider – like a restaurant – but it is recovered from you. Until 2012, there was a specific list of services that were taxed. This list was updated to include more services from time to time. This concept was turned on its head in 2012 with the adoption of the ‘negative list’ method. Now, a list of the services exempt from tax is published instead of the other way around, and it is this list that is modified, usually in each Budget. All services not in the negative list are taxed.

As a result, chances are your everyday expenses will swell.

Charges that banks levy when they issue a demand draft, issue forex, or facilitate a NEFT transfer have service tax tacked on. The fees you pay on debit or credit cards and rents for bank locker rent are also subject to service tax.

Your airline ticket or a non-metered taxi too are pricier due to the service tax. Other frequently-used services that are taxed include those of hotels, air-conditioned restaurants, your brokerage, your telecom operator, commissions you pay a travel agent, and life insurance premiums (other than the Varishtha Pension Bima Yojna).

Quite a few changes were made in the recent Budget. For instance, it withdrew exemptions for services provided by mutual fund agents to the fund house or a distributor to the fund or the fund house. That can, consequently, send fund expenses up. Also incurring tax, thanks to provisions in this Budget, are trips to the amusement park, music concert or pageant tickets priced over ₹500.

What’s not
But tickets to the museum, trips to a zoo, wildlife sanctuary or tiger reserve will be cheaper as they move out of the tax net.

Renting out your house for residential purposes won’t attract tax, as long as the amount is below ₹10 lakh.

There’s no tax on recognised systems of healthcare services and since these cover most forms of healthcare, including Unani and Siddha treatments, you’re unlikely to ever fork over extra to the government. In some cases, while a service may be in the negative list, there are certain exceptions.

Confused? Here’s an example. Most government services are exempt from tax and postal services fall under this head.

But while the exemption covers basic services such as book post, post cards and inland letters, speed post and parcel services are taxed. If the postal department sells insurance policies or other third-party products, that’s taxed too.

Another sweeping change in service tax was made this year, effective once the Finance Act 2015 is notified later this month.

Education and higher education cesses have been removed — or subsumed into the tax rate. The service tax rate itself has been hiked to 14 per cent.

Rates and calculations
The rate used to be 12.36 per cent (including the two cesses). That’s quite a leap from the 5 per cent service tax in 2004!

Now, the tax is calculated on the consideration paid. However, only a certain percentage of this is used for the calculation. This reduction, called abatement, is defined for each service type. In a restaurant, the tax is applicable only on 40 per cent of your bill, working out to 5.6 per cent of the total bill. Now a restaurant bill is more unique as there’s also a service charge that often crops up.

The two are not to be confused, though. One, the service charge is not mandatory, says Sanjeev Lamba, Director, Aristotle Consultancy, a financial consulting firm. Two, the amount collected goes to the restaurant. Not the government!

Three, service charge can be levied even on takeaways (which don’t attract service tax). There’s no defined rate for these charges but it usually ranges from 5-10 per cent. And, four, service charges are considered while calculating the service tax.

On hotel bills, tax is charged on 60 per cent of the amount.

For ULIPs, insurance companies have the choice of charging service tax at 3 per cent for the first year and 1.5 per cent thereafter on the total receipt (including premium for risk cover and investment), instead of the regular service tax rate on the risk cover premium.

Due to changes made in this Budget, if you’re a business class or first class flyer, your tickets will get pricier, thanks to a reduction in abatement.

Tax will now be paid on 60 per cent of the ticket, up from 40 per cent earlier, working out to 8.4 per cent of the total value.

The other worrying point due to the recent Budget provisions is the 2 per cent Swachh Bharat cess coming in, which will be applicable from a date to be notified post-enactment of Finance Bill, 2015.

Says Krupa Venkatesh, Senior Director, Deloitte, the cess will be on the value of service and not on the tax amount, unlike education or higher education cess. That is, the service tax rate will be a whopping 16 per cent.

Finally, even if the GST taxation method is implemented, service tax will still be levied, though rates and methods may change.

So, remember to either factor in the tax component on the services you avail of, or confirm whether rates declared are inclusive of all taxes or not.

Learn more about accounts outsourcing at Aristotle Consultancy.

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