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What is service tax?

Service tax is a tax levied by the government on nearly all the services that you may avail in your day to day life, except the ones on the ‘negative list’ prepared by the government.

The government collects the service tax from a service provider who in turn charges it to the service receiver or the customer that is you. This makes it an indirect tax.

The service tax was introduced by the Finance Act 1994 and is applied on services that are taxable under Section 65 of the Finance Act.

Services which will attract a service tax include, tour operation services, eating at a restaurant, financial lease service, air travel, hotel service, renting of immovable property, renting of motor vehicle, mobile bills, financial services, and so on.

This aforementioned negative list consists of 17 categories of services listed under Section 66D of the Finance Act, 1994, that are exempt from the service tax levy. This includes services by a government or local authority, or the Reserve Bank of India (RBI), services availed for agricultural operations, funeral or burial services, and so on.

The effective service tax rate currently stands at 15%.

It was hiked in the 2016 Union Budget from 14.5% to 0.5% with the introduction of the Krishi Kalyan Cess (0.5%). Prior to that it was hiked from 14.0% to 14.5% with the introduction of the Swachh Bharat Cess which was applicable from November 15, 2015.

A hike in the service tax means all those services that are taxable, like eating out, airline tickets, buying stocks, booking a hotel room, banking and financial services, would become more expensive.

In the upcoming Budget 2017, there is a possibility that Finance Minister Arun Jaitley may hike the service tax further. This would help the Centre mop up more revenue from services and bring the effective rate closer to the 18% once the Goods and Services Tax regime is implemented.