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The new service tax of 14% will jack up costs of shopping, travel, insurance premiums and property 

Service tax is applicable on almost all services we avail in our daily lives. Be it utility bills, restaurant bills or travel expenses, everyone will have to shell out a higher service tax from June 1. Currently, service tax is applicable at 12 per cent with an additional education cess and, secondary and higher education cess, taking the effective rate to 12.36 per cent.

From June 1, the new rate will be 14 per cent. Since education cess and secondary and higher education cess have been subsumed in the revised rate, no cess will apply over and above 14 per cent. The new rate will pinch even though the increase in the service tax rate is only 1.64 per cent. This will especially be the case for larger expenses such as purchasing a flat from a builder or foreign travel. Also, service tax may be applied at different rates in vendor bills on account of various abatement schemes prescribed under the law.

Everyday impact

Let’s take an example of an ordinary family to assess how the new service tax rate will impact their finances. Manoj Sharma, 36, is an IT engineer who lives with his wife and two children in Mumbai. Sharma periodically pays his utility bills, flies to his native at least once a year, pays insurance premiums and occasionally trades in the equity market. Sharma goes out with his family on weekends to watch movies, eat out and shop. Here’s how the new rate will add to Sharma’s expenses.

Service tax is applicable on under-construction flats. For flats where the carpet area is over 2,000 sq ft and the cost is Rs 1 crore or more, service tax is currently applicable at 30 per cent of the gross value of the property, resulting in an effective service tax rate of 3.71 per cent. From June 1, the effective service tax rate will be 4.2 per cent of the gross value of the property. The above abatement is subject to the condition that gross value charged includes value of land. So, for a Rs 2 crore flat, the service tax will go up by Rs 98,000 post June 1.

Cost of air travel

Currently, air travel enjoys abatement of 60 per cent on the value of taxable service. However, Budget 2015 has amended the law with effect from April 1, 2015, to provide that while economy class travel will continue to enjoy 60 per cent abatement, bookings (other than economy class) will enjoy only 40 per cent abatement . Additionally, increase in service tax to 14 per cent could result in proportionate increase in the composition rates/alternative tax rates for various services providers including air travel agents, insurance agents and money changers.

Impact on insurance premiums

Sharma’s life and general insurance premiums could go up as a result of the additional service tax. Life insurance premiums currently attract service tax at 3 per cent in the first year and 1.5 per cent of the premium charged in the subsequent years. For all traditional life insurance plans, service tax rate will increase from 3 per cent to 3.5 per cent for first year premiums and from 1.5 per cent to 1.75 per cent for subsequent years’ premiums.

Similarly, for all other insurance products such as general insurance and unit linked insurance plans the applicable service tax will go up from 12.36 per cent to 14 per cent.

New services in tax net

The government plans to introduce Swachh Bharat Cess applicable at 2 per cent of the value of notified services. It has widened the service tax base to cover additional services such as:

*Access to amusement facilities providing fun or recreation by means of rides, gaming devices or bowling alleys in amusement parks, amusement arcades, water parks and theme parks

*Admission to specified entertainment events

*Aggregators such as app-based cab services

Services not taxed

Education remains a priority sector for the government. So, pre-school education and education up to higher secondary school or equivalent remains out of the service tax net. Likewise, certain common transportation modes such as metered cabs, auto rickshaws, metro and monorail are kept out of the service tax net.