With the levies announced in the Budget kicking in from June 1, service tax will now be charged at 15% as the krishi kalyan cess of 0.5% comes into force. Similarly, a 'luxury tax' of 1% will be imposed on cars priced above ₹10 lakh and services valued at above ₹2 lakh.
The hike will push up retail prices of almost all everyday products and services, including air travel, restaurant meals, movie tickets, telecom services, credit cards and even electricity and mobile bills. Millions of middle-class families, who spend nearly half of their monthly budget on services, will feel the pinch as almost all services — barring a small negative list — are taxed. This is the third such hike since February 2015.
In the Budget 2015-16, finance minister Arun Jaitley raised the service tax rate from 12.36% to 14%. The Swachh Bharat cess of 0.5% came into effect in November. The extra krishi kalyan cess and service tax will increase the total tax to 15%.Revenues collected through the krishi cess “would be exclusively used for financing initiatives relating to the improvement of agricultureg and welfare of farmers,” Jaitley had said.
The luxury tax is part of the government’s strategy to clamp down on cash transactions. The tax will be collected by the car seller and will be applicable on the ex-showroom price. It is likely push up prices of sedans, such as, Toyota Corolla Altis, Honda Accord, Skoda Superb, VW Jetta, M&M’s XUV 500, Hyundai’s Elantra and the recently launched top-end version of Maruti Suzuki’s Vitara Brezza. Similarly, services such as tent houses, catering, estate management and health services could cost more.
The aim of the tax was “to reduce the quantum of cash transaction in sale of any goods and services, and for curbing the flow of unaccounted money in the trading system,” Jaitley had said in the Budget.These levies, particularly a higher service tax, could push up inflation rates. Retail inflation rose to 5.39% in April, snapping a three-month easing trend. A high inflation rate will weaken the chances of an interest rate cut when the Reserve Bank of India (RBI) reviews the monetary policy next week. Retail inflation rate, which the central bank tracks acts as a proxy for changes in shop-end prices, is now inching towards the RBI’s short-term threshold of 6%.
