RATE OF SERVICE TAX LOWERED

[Dr. Sanjiv Agarwal]

All of us are happy as there is widespread news of rate of service tax being cut or reduced by two percent from 12 to 10 percent - some thing which normally does not happen so far as taxes are concerned but it is first time in service tax.

The year 2009 is unusual for India, it being an election year where country goes to polls, few weeks from now. That's why, we had a vote - on - account or so called interim budget in place of otherwise a full Union Budget culminating into Finance Act, 2009. As an interim measure, Government announced so much in so little a time to pamper citizens, much to their advantage, irrespective of whether we can economically and financially sustain it as a county or not. On service tax front , it was in the regime of this Government only that rate of service tax was hiked from 8 to 10 and then 12 percent  in last five years .

The announcement of lowering the service tax burden is a welcome step, though based on present budget estimates, it could cost a revenue of Rs 1200 crores to the exchequer, yet it was inevitable as Government had lowered the excise duties steeply from 16 to 10 and 8 percent in many cases, thus creating a disparity between tax structure of goods and services and resultant Cenvat credit anomalies. Another reason is that the Empowered Committee on VAT and Ministry of Finance have now zeroed in on the idea of having dual structure of  goods and service tax (GST) and as such there would be separate 8 percent central and state duties making it a total of 16 percent.

Section 66 of Finance Act 1994, which governs service tax law in India is the charging section which provides for rate of service tax, presently twelve percent. Legally one can not charge or tinker away with this rate as it is provided in the statute itself. What the Government has done to provide benefit to service tax payers is that it has issued a Notification No 8/2009-ST dated 24 February 2009 providing for exemption to all taxable services from so much of service tax leviable thereon under section 66 of the Finance Act as is in excess of rate of ten percent  of the value of taxable services.

As a result, all services become dearer by 2.06 percent (including cess on education ). This would include all services- be it industrial, commercial or consumed by individuals as personal services. Thus, advertising service, business related services, professional services, banking and financial services, stock broking activities, all will cost less. Not only this, a host of personal services like beauty parlour, dry cleaning, health and fitness centers (gyms), club fees, travel related services, air ticketing, car hire etc would also be available at reduced cost. If one in planning a function or event, all related services such as hiring of marriage lawn or mandap, catering, photography, videography etc will be cheaper . If you are buying a house or constructing one, you have reasons to cheer as after lower interest regime, you will have to cough out lesser service tax on services of construction, real estate brokers, architects etc. Infact as all input items and services have been made cheaper now, the builders must also reduce the prices for customers as there is a reduction in duties on steel and cement too. The over all costs have come down.

All notifications are effective form the date of notification unless otherwise specified. As such, N. No 8 is effective from 24th February 2009 itself and all services provided from that date or amount received as advance for providing taxable services in future shall be subject to levy of service tax @ ten percent (12 percent less 2 percent) plus applicable education cess and secondary and higher education cess. Therefore, effective rate will be 10.30 percent wef 24.02.2009 in place of 12.36 percent. It may be noted that this rate shall be applied on all taxable services rendered on or after 24 February 2009 and not on the services provided earlier but billed on or after 24th February 2009.

Service receivers are however, cautioned that the reduced rate of service tax has been made effective from  24th February, 2008 itself and as such, as a enlightened customer, they should not accept any service where service tax is charged at a higher rate. Many a times, service providers factor the cost of service tax in their price but do not issue a bill which may result in leakage of revenue for the Government. In such cases where service tax as charged, one should also insist on invoice. In case you are using the service as official service, you may get the benefit of duty credit on input services. So next time when you consume a taxable service, pay a little attention to what you contribute as service tax.