Transport of goods through railways comes under tax net.
Even as finance minister Pranab Mukherjee decided to continue with the 2 percentage point exemption in service tax to 10 per cent in 2010-11, railways, airways and insurance sectors received shocks.
Experts say that the measure of keeping the service tax at 10 per cent is in line with the overall stance of fiscal consolidation, as maintaining this rate pre-empts the introduction of Goods and Services Tax (GST).
“Service tax being kept at 10 per cent is in line with fiscal consolidation…If we know that we are going to move on to GST a year later then having two separate rates for excise and service tax would have been counterproductive,” said Rajeev Dimri, analyst with BMR advisors.
“Right now, the government would like to create least impact on the industry.”
By adding eight new services in the tax regime and expansion of some of the existing services, the government pegged the total receipts from the service tax at Rs 68,000 crore during 2010-11, up from Rs 58,000 crore as per the revised estimates for 2009-10.
Transport of goods through railways, which was till now exempted from service tax, will have to bear the burden of 10 per cent service tax. Such a measure is expected to reduce the competitiveness of the railways.
Airways will also be hit as scope of air passenger transport service has been expanded to include domestic journeys and international journeys for all classes.
Before such an announcement, service tax was paid only on services provided to business class and first class of international flights.
The government also brought the service tax on fund management charges (FMC) in unit-linked insurance plans (Ulips) on same level as mutual funds industry.
Service tax will be levied on FMC, which is capped at 135 basis points, while other charges like allocation, policy administration will be exempted from the service tax.
Insurers expect an increase of 40-50 basis points on policyholders’ internal rate of return and reduce the cost of Ulips further.
For Information technology, taxable services were expanded to cover all cases, irrespective of its usage.
Moreover, the government brought new services within the ambit of services tax, which includes services provided for maintenance of medical records of employees of a business organisation and electricity exchanges.
Health checkups undertaken by hospitals and health services provided under health insurance schemes, offered by insurance companies, will be taxed.
Services promoting brand of goods, services and events of a business entity have also been brought under the tax net.
