Taxing of services at the four rates- a pattern shift from the standard

We all took some time to absorb the fact that services have been taxed and then got used to increase in the service tax rates over the years. Finally, before the GST comes into play from the 1st of July 2017, we are conversant with the taxation of services at 15 per cent (14 per cent plus Krishi Kalyan cess of 0.5 per cent and Swach Bharat cess of 0.5 per cent). The people of the country have also taken the hike of the service tax to 18 per cent in their stride, based on the fact that most of the goods will be taxed at 18 per cent under GST.

The difference that the GST brings to light is the four different rates of taxation for the services and the involvement of the states into services taxation. The four tax rates 5, 12, 18 and 28 per cent are applicable to the services. The thought process that goes behind this differential tax regime is that different economic classes get taxed differently. Exemptions applicable to existing services have been maintained. For example, the educational institutions and healthcare services continue to be exempt. The exemption list released by the GST council has 83 listed items.

Petroleum has been kept out of the purview of GST and hence, the 5 per cent rate has been kept for services that make use of petroleum products. The transport of goods by road, rail or air and cab aggregator services will be taxed at 5 per cent. The restaurants and hotel services have been distributed in the 12, 18 and 28 per cent rates. The highest slab has gone to 5-star hotels, gambling, race courses, theme parks and entertainment events. The restaurants with air conditioning and having a liquor license and those offering bundled conventional hall services will be taxed at 18 per cent. This segment seems to be the biggest beneficiary as they were having dual taxation of VAT and service tax and combined incidence was coming to around 28-29 per cent. The restaurants which are not having a liquor license and are not air-conditioned have also been taxed at the lower rate of 12 per cent.

The fraternity of service providers who have been paying the service tax are used to being classified under different categories like an advertising agency, cable operator, cost accountant, legal, maintenance and repair, packaging, security agency, stock broking and underwriter service etc. Most of them were looking for the listing in the schedule of GST rates released by the GST council only to be dejected. There is no change and there is nothing new for them. All these services will be taxed at 18 per cent. One single entry at serial number 36 of the GST council service schedule list says it all- All other services not specified elsewhere to be taxed at 18 per cent.

The service providers have a different challenge as well. Most of them would have to deal with the state government taxation rather than the convenience of one central authority. The compliance will also require a monthly filing and reconciliation to avail the input credit with each state tax agency where they are providing the service. The only relief will be that the filing will be online and not requiring a physical presence at each state tax office.

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