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Service Tax: The Devil Lies in the Detail

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Service Tax: The Devil Lies in the Detail

Finance Minister Arun Jaitley on Friday increased service tax to 14 per cent from 12.36 per cent in his first full-year Budget, which means several bills will soar.

While most people are still coming to terms with the fact that eating out, air travel etc. is set to get more expensive, there may be still some more bad news.

The effective rate of service tax could very well be 16 per cent.

"The government left most of the indirect tax (customs, excise tax) rates largely unchanged as it is already working on implementing GST from April 1, 2016. However, it increased the service tax rate to 14 per cent (likely to increase to 16 per cent due to the 2 per cent Swachh Bharat cess) from 12.36 per cent which will be negative for hospitality, telecom and other services," Kotak Institutional Equity said in a post-Budget report

Mr Jaitley proposed an enabling provision to levy 'Swachh Bharat' cess at a rate of 2 per cent or less on all or certain services in the Budget. Swachh Bharat is among the major initiatives of the Narendra Modi government, which has embarked on a major cleanliness drive across the country.

"This cess will be effective from a date to be notified. Resources generated from this cess will be utilised for financing and promoting initiatives towards Swachh Bharat," Mr Jaitley said.

Tax experts say there is a fair bit of ambiguity around the Swachh Bharat cess and expect the notification to come in a week, which would makes things clearer.

"It's ambiguous and unclear so far. If it's is over and above the 14 per cent, then we are indeed looking at paying an effective rate of 16 per cent of the value of the services," tax consultant Sudhir Dash told NDTV.

Movie outings, hotel stays, gym memberships, club memberships, salons, spas, radio cab rides are all set to cost more from the next financial year starting April 1, 2015.

The hike in service tax will also impact transactions like buying a house - service tax is a component in property transactions.

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