New Service Tax Regime Introduced from July 1, 2012

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By Ian Bhullar

Jul. 2 – A new service tax system has been introduced this week in India based on a list of 38 exemptions, rather than the previous list of 119 explicitly taxed activities. Under this regime, a tax of 12 percent will be levied on all services not included in the exemption list.

This is an important change for businesses engaging in or utilizing services in India. Moreover, since the new regime has been introduced to align the current system with the proposed Goods and Service Tax (GST), it provides a strong indication that India is on track to introduce the latter, more radical set of tax changes.

The 38 exemptions include the following:

  • Metered taxis and auto-rickshaws
  • Betting, gambling, lotteries
  • Entry to amusement parks
  • Transport of goods or passengers
  • Transmission and distribution of electricity by distribution companies
  • Funerals, burial and transport of deceased people
  • School, university and approved vocational courses
  • Services relating to work contracts for schemes under the Jawaharlal Nehru National Rural Urban Renewal Mission or the Rajiv Awas Yojana (an urban housing construction and slum reduction project)
  • Services provided by advocates to other advocates and business entities up to a turnover of INR10 lakh (INR1 million) in the preceding financial year

Due to continuing negotiations between Railway Minister Mukul Roy and authorities leading the taxation changes, it is still not clear whether taxes will be imposed on air-conditioned and first-class railway services. Such a rise is likely to cost INR6,000 crore (INR60 billion) if born by the railways, or to increase rail ticket prices by 3.6 percent if not.

The Times of India has reported that some gray areas exist. For example, there is no service tax on home rental itself – but if a house is used for commercial purposes it may become applicable.

“It is always good to take advices of tax practitioners so as to avoid any confusion. Even those items that are included in the negative list of service tax will also become liable for tax in certain conditions,” Sheetal Jain, chair of the Indore branch of the Institute of Chartered Accountants of India says.

As well as easing the transition towards the GST, the move will assist the Indian government in increasing its service tax collection from INR97,000 crore (INR970 billion) to INR1.24 lakh crore (INR1.24 trillion) during 2012-2013.

Nevertheless, the BJP opposition has challenged the UPA government to roll back the new system, charging that it is unfair to increase taxes at a time of already rising inflation.

Of note to foreign businesses investing in India, newly taxed services include international air travel and express delivery (although basic postal services remain exempt).

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