Most services are likely to attract a tax of 18 percent under the Goods and Services Tax (GST) as Union Finance Minister Arun Jaitley presents the Union Budget on February 1.
It will be interesting to witness whether the Centre raises the service tax rate from the existing 15 percent by at least one percentage point to 16 percent as a precursor to the rollout of GST.
However, the Centre and states have agreed to rollout GST from July 1, 2017, after which most services will turn costlier.
Also, a higher service tax, even for three months, will help the Centre partially offset the revenue loss after the GST kicks in, sources indicated.
Under GST, the service tax collections will be divided equally between the Centre and the states. A service tax closer to the GST rate will also help consumers avoid a greater price shock after the new system is rolled out.
Jaitley-headed GST Council has agreed on a four-slab structure -5, 12, 18 and 28 percent-along with a cess on luxury and 'sin' goods such as tobacco.
Within these, two standard rates of 12 percent and 18 percent could extend to a majority of the taxable goods.