May 24
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Analysis of Service Tax Rate increase from 12.36% to 14%
The rate of Service Tax was increased by the Ministry of Finance on May 14th 2015 and came into effect on June 1st 2015. The rate of Service Tax was increased from 12.36% to an all inclusive, flat 14%, which included Subsuming Education Cess and Secondary & Higher Secondary Education Cess.
How the increase in Service Tax affected Various Services?
The increase in Service Tax affected some services in the following way:
- Air Travel Agents saw their domestic booking rates rise from 0.6% to 0.7% and international booking rates rise from 1.2% to 1.4%
- Life Insurance saw premium rates rise from 3% to 3.5% and every subsequent yearly premium rise from 1.5% to 1.75%
When should Old Rates and New Rates Apply?
There are a number of scenarios under which there is a demarcation between when the old service tax rates and the new rates are applicable
- For Services Provided Before June 1st 2015:;;
- If the invoice was issued after June 1st 2015 but the service was provided in May 2015 and the payment was received in June 2015, then the service tax is to be paid at the new rate of 14%
- If the invoice was issued on June 15th 2015 but the service was provided before June 1st 2015 and the payment was received on May 30th 2015, then the service tax is to be paid at the old rate of 12.36%
- If the invoice was issued before June 1st 2015 but the service was provided in May 2015 and the payment was received after June 1st 2015, then the service tax is to be paid at the old rate of 12.36%
- For Services Provided After June 1st 2015:
- If the invoice was issued in May 2015 and the service was provided in June 2015 and the payment was received in May 2015, then the service tax is to be paid at the old rate of 12.36%
- If the invoice was issued after June 1st 2015 and the service was provided in June 2015 but payment was received in May 2015, then the service tax is to be paid at the new rate of 14%
- If the invoice was issued in May 2015 and the service was provided in June 2015 and the payment was made on June 1st 2015, then the service tax is to be paid at the new rate of 14%
Impact of the Increase in Service Tax Rate:
The increase in the service tax rate has had the following impact:
- The change in the rate resulted in an increase in the service tax amount paid by the service provider after June 1st 2015.
- Depending on the terms of contract between two parties, the increased service tax of 14% would have to be borne by the service provider if the contracted price includes all taxes.
- If the terms in the contract include service tax as an extra applicable, then the service provider can collect and pay the service tax.
- The levy of Education Cess and Secondary and Higher Education Cess on Service Tax is abolished from June 1st 2015. These charges cease to be applicable from June 1st 2015
- Swach Bharat Cess will also not be applicable from June 1st 2015 and shall only be applicable from the date to be notified.
How Ongoing Contracts can Circumvent the increase in Service Tax Rate:
On going contracts can deal with the tax rate increase in the following ways:
- For services completed before June 1st 2016, the services provided up to the end of May 2015 will have to be billed. If not, then the new rate of 14% will be applied.
- Any part bills to the extent of completed services issued before June 1st 2016 could be paid at the old service tax rate of 12.36%
- Invoices raised on advances before 30th May 2015 for future services could be paid at the old service tax rate of 12.36%
- If invoices are raised before June 1st 2016 for services to be provided after June 2016 then the service tax rate applicable is 14%
