From June 1, service tax will be charged at 15% as the krishi kalyan cess of 0.5% comes into force. Similarly, a “luxury tax” of 1% will be imposed on cars priced above Rs 10 lakh and services valued at above Rs 2 lakh.
A hike in the tax will push up retail prices of almost all everyday products, and services, including air travel, restaurant meals, movie tickets, telecom, credit card, electricity and mobile bills.
Millions of middle-class families, who spend nearly half of their monthly budget on services will feel the pinch, as almost all services — barring a small negative list — are taxed. This is the third such hike since February 2015.
In Budget 2015-16, finance minister Arun Jaitley raised the service tax rate from 12.36% to 14%. The Swachh Bharat cess of 0.5% came into effect in November. Add to it, the krishi kalyan cess, and service tax will increase to 15%.
Revenues collected through the krishi cess “would be exclusively used for financing initiatives relating to the improvement of agricultureg and welfare of farmers,” Jaitley had said.
The aim of the tax was “to reduce the quantum of cash transaction in sale of any goods and services, and for curbing the flow of unaccounted money in the trading system,” Jaitley had said in the Budget.
These levies, particularly a higher service tax, could push up inflation rates. Retail inflation rose to 5.39% in April, snapping a three-month easing trend.
A high inflation rate will weaken the chances of an interest rate cut when the Reserve Bank of India (RBI) reviews the monetary policy next week.
Retail inflation rate, which the central bank tracks for interestrate decisions, and acts as a proxy for changes in shop-end prices, is now inching towards the RBI’s short-term threshold of 6%.