Budget 2017: FM may hike service tax from 15% to close gap with 18% GST rate

Gaurav ChoudhuryMoneycontrolWill the Centre raise the service tax rate from the existing 15 percent by at least one percentage point to 16 percent as a precursor to the rollout of goods and services tax (GST)?

With most services likely to attract a tax of 18 percent under GST, finance minister Arun Jaitley will likely raise the existing service tax rate in the budget for 2017-18 to align it closer the GST rate.

The Centre and states have agreed to roll out GST from July 1, 2017, after which most services will turn costlier.

Also, a higher service tax, even for three months, will help the Centre partially offset the revenue loss after the GST kicks in, sources indicated. Under GST, the service tax collections will be divided equally between the Centre and the states.

A service tax closer to the GST rate will also help consumers avoid a greater price shock after the new system is rolled out.

Until now, service tax is a central levy, collected only by the Centre. At Rs 231,000 crore service tax accounts for more than 14 percent of the Centre’s total tax revenues of Rs 16,30,887 crore 2016-17.

Most services, except those in the negative list of essential services such as healthcare and education, will come under GST.

The Jaitley-headed GST Council has agreed on a four-slab structure –5, 12, 18 and 28 percent—along with a cess on luxury and `sin’ goods such as tobacco.

Within these, two standard rates of 12 percent and 18 percent could extend to a majority of the taxable goods.

A bureaucrats’ panel is currently working on “classification”—a comprehensive list specifying the tax rate that each good and service will attract.

Sources said, there was a view within the GST council that services such as telecom and insurance should be taxed at a lower band rate of 12 percent, but the Centre is the opinion that the all taxable services should be clubbed under a single rate of 18 percent.

 “The revenue department has worked out the estimates for potential revenue loss to the Centre because it has to forego half of the service tax collections,” a source told Moneycontrol.

“The Centre’s view is that the rate should be sufficient to take care of its revenues,” the source said.