Swachh Bharat cess may raise cost of services

Suresh Nair, Tax Partner, EY

In the Budget, the Finance Minister was emphatic on the benefits to the middle class taxpayers, easing governance laws and proposals to maximise benefits to economy. The standard effective excise duty rate has been increased from 12.36 % to 12.5%. This also implies that generic customs duty rate on imported goods would be higher from 28.85% to 29.44% (due to the increase in the component of customs duty aligned to central excise).

However, such marginal increase in rates appears to have been designed more with a 'simplification of duty structure point of view' and should on a stand alone basis not have a substantive negative impact on the consumers.

On service tax, to facilitate transition to GST, service tax (including education cess rate) has been increased from 12.36% to 14%. Similarly, enabling provision to levy Swachh Bharat Cess at a rate of 2% on all or certain services could be implemented. This increase in service tax rate (with Swachh Bharat Cess) could increase the overall cost of services received by the consumer. Whether credit of Swachh Bharat Cess would be available to offset against output taxes is not clear.

Nonetheless, there have been reductions in duty rates, especially for certain consumer durable goods, which should bring cheer to the customer. For instance, customs duties have been exempted on parts for manufacture of tablet computer and microwave oven and on import of Digital Still Image Video Cameras and Organic LED TV panels to name a few. In footwear industry, Basic Excise Duty on specific leather footwear of Retail Sale Price exceeding Rs.1000 per pair is being reduced from 12%. On the medical front, customs duties have been fully exempted on artificial hearts. Further, with regard to import of life saving drugs and medicines by an individual for personal use, Import certificate (required for such imports) has been made valid for a one year period (rather than on every import). Also, all ambulance services will be exempt from service tax going forward. This should be an appealing relief to patients availing the said services.

As expected, excise duty on cigarettes and tobacco has been hiked. Whether this per se would impact the consumption of the said product is another question in itself. From a service tax perspective, many exemptions have been removed. Relevant for consumers include increase in service tax on 60% of the value of air transport for business class tickets (as against the earlier 40%). Further, service tax is proposed on admission to concerts, pageants, award functions, musical performances and certain sporting events where admission charge is more than Rs 500.

Similarly, activities undertaken by chit fund foremen in relation to chit, and lottery distributors and selling agents, in relation to lotteries would now be liable to service tax.

Given that many exemptions have been withdrawn and rates increased, the overall immediate impact on the consumers could be higher. However, since the Government is committed to introducing a single Goods and Service Tax ('GST') by April 2016, which is likely to bring down the cascading effect of taxes and make India a common market, it is expected that in the long run consumers will be the final beneficiaries. GST – Way To Go!

Uma Iyer, Senior Tax Professional EY contributed to the article
The views expressed in this article are personal to the author/s