Budget 2015: Effective service tax may increase to 16%: KPMG

Latha: Will service tax really be 16 percent?

A: The Budget makes a provision that the government can notify a 2 percent Swachh Bharat Cess on taxable service value. This means that now it has increased from 12.36 percent to 14 percent from the date we notify. In addition to that, government also can notify a 2 percent additional Swachh Bharat cess on taxable value of service which takes the total service tax to 16 percent.

Latha: We still do not have clarity on which services or does the language give you the impression that all services come under this net?

A: As of now it looks like it is on all services which means that goods and service tax (GST) proposed rate would be applicable even this year itself if 16 percent is to be implemented.

Latha: I do not remember what the Budget said in terms of how much money they are getting from service tax itself?

A: Service tax this year - it is Rs 2,09,000 crore.

Latha: How much was FY16 rise over FY15?

A: I am not sure but I think it is somewhere around more than 30 percent.

Latha: So if it has to be 30 percent, 4 percentage point increase. You go from 12 to 16 percent that itself is 33 percent higher isn’t it and there are no new services coming in. So that is what gave me the doubt do they mean all services?

A: If we have to increase it by another 4 percent which is exactly what you said 33 percent, than this year Budget expectation of revenue from service tax would be anything between Rs 2,80,000-2,90,000 crore.

Sonia: Do you think consumption could get hit a lot from the middle class because on one hand you have higher service tax; on the other hand the government has incentivised greater investments in to health insurance plan and pension plans. So there would be higher daily expenses and greater savings. Do you see consumption get hit a lot?

A: We have to see the fine print may be once they notify that. Assuming that the basic services are out of this then perhaps most of the services are consumed by middle class and the above. So to that extent the impact will be tepid based on how much of those service are consumed by which class of people. It may not be across the table impact as far as consumer is concerned.

Sonia: There was some clarity given in terms of exemption of long-term capital gains tax on listing of Real estate investment trusts (REITs) etc. Do you think that will make REITs a little more attractive in India now?

A: I am not the right person to talk about it.

Latha: Any more details you were expecting on service tax itself? We have got the Finance Minister statements, where he says enabling provision in the finance bill to levy service tax on all services provided by the government to any business entity so services provided by the government could cover coal and spectrum and the list of government services which will fall under this net has not yet been decided but that could perhaps include railways. Any more clarity you need or you can give us?

A: This is one of the biggest impact in the entire Budget that all government services now becomes taxable.

Latha: So looks like service tax could go up substantially for all these services up to 16 percent?

A: Right, one point is that it is a matter of time that the service industry starts paying higher taxes because if you look at the goods sector, manufacturing sector which is just about 18-19 percent of the total gross domestic product (GDP) it is almost generating 3/4th of the tax revenue. So may be service contribution towards GDP is now gone up to almost towards 60 percent and which is weighing may be 1/3 rd of the revenue as of now.