Finance minister Arun Jaitley could raise the service tax rate in the Budget to be presented on February 1, a move that will increase the cost of eating out, going to the movies or flying.
Two senior government sources told Hindustan Times on Friday that the existing rate of 15%, which includes two cesses, could be raised by another 0.5% to 1%.
“The government might want to increase the service tax so that the shift to GST is not abrupt,” one of them said, referring to a proposed a Goods and Services Tax that has missed several deadlines because of political wrangling. Jaitley has said he wants to roll it out by July 1.
Service tax is a charge service providers collect from customers and then pass on to the government. There are some services provided by state and central governments that do not attract this tax.
A rise in service tax could give the government some elbow room to offer cuts in personal income tax or spend more to revive private consumption that received a shock after Prime Minister Narendra Modi pulled out high-value banknotes from the economy in November.
Should the government change the rate of service tax, businesses will have to spend to alter their systems to reflect this – an additional cost at a time when the GST is set to be rolled out, tax experts say.
In 2016-17, the government pegged revenue collection from service tax at Rs 2.31 lakh crore.
Service tax rates have seen an increase over the last two years. In 2015-16, service tax was increased from 12.36% to 14%. The Swachh Bharat cess of 0.5% also was hitched to it. This financial year, the Krishi Kalyan cess of 0.5% was bundled along, taking the tax rate to 15%.