Increased Service Tax Rate to be Effective from June 1, 2016

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Increased Service Tax Rate to be 15% Effective from June 1, 2016

Increased Service Tax Rate The Union Budget for 2016-17 was presented by the Hon’ble Finance Minister Shri. Arun Jaitley on February 29, 2016, in the LokSabha. The Finance Bill, 2016 was passed by Lok Sabha and later on by Rajya Sabha on May 5, 2016, and May 11, 2016, respectively. Now, with the final ascent of the Hon’ble President given on Saturday, May 14, 2016, the Finance Bill, 2016 proposed along with the budget has become a law.

Earlier Swachh Bharat Cess (“SB Cess”) was levied @ 0.5% on the value of all taxable services which increased Service tax rate from 14% to 14.5%. Now a new cess namely ‘Krishi Kalyan Cess’ (“KKC”) will be levied at 0.5% on the value of all taxable services w.e.f June 1, 2016, increasing the rate of Service tax from 14.5% to 15%.

INCREASED SERVICE  TAX RATE TO BE 15% EFFECTIVE FROM JUNE 1, 2016

The reason for increased  Service tax rate that will be effective from June 1, 2016, is summarized below:

Krishi Kalyan Cess @ 0.5% on all taxable services

In Finance Bill, 2016 the Government has announced a new cess namely ‘Krishi Kalyan Cess’ (“KKC”) to be levied at 0.5% on the value of all taxable services (w.e.f June 1, 2016). The service tax has been increased considering the welfare of the farmers and is done with an objective to support them by promoting and financing the initiatives to improve agriculture. A new Chapter VI has been introduced in the Finance Bill, 2016 in this regard which contains the relevant provisions applicable to the enactment of the Finance Bill, 2016. Hence, an effective rate of Service tax is going to be increased from 14.5% to 15%:

  1. Though Krishi Kalyan cess is being implemented with effect from June 1, 2016, and its credit is available as Cenvat in the hands of a service provider, a suitable amendment is needed in the Cenvat credit rules also, in view of the treatment of Swachh Bharat Cess (“SB Cess”) in terms of TRU F. No. 334/8/2016-TRU dated February 29, 2016 [Para 3.1].
  2. Service tax rate would eventually increase to 15% w.e.f. June 1, 2016:
    . An example showing levy of Service tax and SB Cess & KKC is given below assuming Rs. 1,000/- as value of a taxable service:
Particulars Tax/ Cess (Rs.)
Value of taxable service (a) 1,000/-
Add: Service tax @ 14% on (a) 140/-
Add: SB Cess @ 0.5% on (a) 5/-
Add: KKC @ 0.5% on (a) 5/-
Total: 1,150/-

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