Hike in Service Tax 2012, and the Problems to Follow

Posted on March 26, 2012 in Business and Economy

By Raviraj Anchan:

The service tax was introduced way back in the Finance Act, 1994; on many services rendered in India. The intention to introduce this Indirect tax was to find new avenues to generate revenue for the country. Initially, service tax was charged on few services like telecom systems, Insurance and stock-broking services; however, since 1994, there were several amendments made in the tax rates and the services which would come under the liability to pay service tax.

In order to obtain additional revenues, the finance minister Pranab Mukherjee  announced a raise in the service tax from 10% to 12% in the Budget for 2012. This hike in the tax service tax rate has made the services in India more expensive. Many sectors would be facing a negative impact due to is also expected to go up, and telephone bills and restaurant bills would also increase. Travel, tourism and the hospitality sector would be hit hard by this amendment. The real estate sector is also not being spared, as the cost for new houses would increase due to the increase in the cost of construction.

As this issue is expected to disrupt the Indian economy to some extent, it is more important to see how the service providers who have been affected by this hike in the service tax rates will manage to balance out the burden of this tax hike. It is more likely that the burden would be ultimately passed to the consumer, but on the other hand, the service providers would also be facing an issue of competition from their foreign counterparts, as their services would seem to be comparatively more expensive than the latter’s. This is thus ultimately to unfavourably affect Industrial growth in the country.

The Government needs to take into consideration the levels of discomfort which would be caused to the service sector due to changes in the revenue system and the problems caused to the consumers; and therefore needs to take crucial measures to resolve this important issue.