Friday, March 23, 2012

More Bad News after Budget 2012 - Service Tax and Excise Duty Increased in India

The past few days have been pretty chaotic in India. The Finance Budget for the financial year 2012-13 was released by our Finance Minister and ever since, the markets have become even more volatile than what it was before. The general sentiment across industries and sectors is that of “Disappointment”. One of the key proposals by the Finance Minister that is going to affect the Common Man in India is the “Hiking of Service Tax”.

This article is my take on how this hike in Service Tax in India will affect you and me.

Shall we get started??

What is the New/Proposed Service Tax & Excise Duty %?

The Service Tax and Excise Duty has been hiked from the existing 10% to 12%.

Note: This 12% is not uniform across all sectors. The actual Service Tax & Excise Duty % will vary in some sectors.

If you thought for a moment, “Hey, what will this Marginal 2% cost me? Not much I suppose” you are very wrong my friend. 2% may seem like a small or insignificant number. But, trust me; by the end of this article, you will change your mind.

What are the Things that this increase in Service Tax will affect?

This hike in service tax and excise duty is almost uniform across all sectors. Almost every single item you purchase may get costly. There are 17 items like Essential Education, Public transport and Services meant for Agriculture are exempt from this tax. Any other service is taxable at the prevailing rate %.

Some examples:
1. Telephone Bill
2. Eating Out – Restaurants
3. Gyms
4. Car Maintenance/Service/Rentals
5. Cable TV
6. Healthcare
7. Life Insurance Premium (Mortality Charges only)
8. Services like Catering & Photography
9. Real Estate Agents & Stock Broker
10. Courier Service
11. Salons & Spas
12. Jewelry
13. Holidays & Vacations
14. Etc.

Now, Go back to the previous paragraph and think if you still feel this 2% increase will not affect you by much.

Are you one of those stubborn people (like me of course) who take some more convincing? Did you say “Come on Anand, the list is pretty big, but the impact is only 2%? What difference would that make?”

Ya, Right… Read on my friend!!!

Impact of change in Service Tax & Excise Duty on various Sectors:

Healthcare:

The Healthcare industry is already considered very costly and unaffordable by the middle class folks. Things are going to get worse. All visits to the doctors, diagnostic tests like Scans, CTs etc. are about to get costlier. A Scan that cost you Rs. 5500/- (5000 + taxes) last year will cost you at least Rs. 5600/- Now, if we consider the fact that the person who is buying the Scan machine would have paid a higher tax on the machine when he bought it, he is bound to increase the base rate on the scan and so, the number could go up to even Rs. 6000/- or more.

Life Insurance:


Life Insurance Policies are going to get costlier too. The service tax on the premium for policies where the mortality charges are explicit has also been raised on the charges. For other policies, the service tax on the gross premium for the first year has been hiked from 1.5% to 3%, while subsequent premiums will be taxed at 1.5%.

Automobiles – Cars:

Excise duty on Sedans that are longer than 4 meters has been hiked. It was 22% up until now and it will be 24% to 27% depending on the Car’s Engine capacity.

Jewelry:

In Indian culture, gold and jewelry are an integral part of every marriage. If you are someone who is planning to get married this year (like me) this will come as real bad news.
1. Customs Duty on Gold & Platinum has been increased from 2% to 4%
2. Excise Duty on Gold has been increased from 1.5% to 3%
3. Customs Duty on all precious stones (Including Diamonds) is set at 2%

So, if we combine all these three taxes on a gold necklace with precious stones for your wife or fiancée, think of at least a Rs. 5000 or more increase in the overall price of the item.

Holidays & Travel:

If you are someone who goes on yearly vacations or someone who uses Air Travel frequently or prefers AC coaches in Trains, then there is more bad news for us.
1. Stay in Resorts and Hotels will attract a Luxury tax of 12.5%
2. Restaurant Bills will include the increased service tax of 12% (Instead of the existing 10%)
3. Service Tax is applicable on Air Tickets, Train Tickets (for AC coaches) and also for services provided by Travel Agents & Tour Operators

That is a whole bunch of bad news. Isn’t it?

Now tell me, do you still think this hike in Service Tax and Excise duty isn’t going to affect you by much?

If you are still not convinced, let’s take a look at a simple example calculation.

Monthly Recurring Expenditures:

The following are recurring expenses that we pay every month. Below is how the new service tax structure is going to affect us.

S.NoExpense DescriptionMonthly Expense@ Existing Tax %@ New Tax %
1Telephone BillsRs. 2000Rs. 240Rs. 288
2Eating OutRs. 2000Rs. 240Rs. 288
3GymRs. 500Rs. 60Rs. 72
4Car Maintenance & ServiceRs. 2500Rs. 300Rs. 360
5Cable TVRs. 250Rs. 25Rs. 30
6Stock BrokerRs. 1500Rs. 150Rs. 180
Note:
1. Telephone bill is calculated for 2 Mobile Phones & 1 Land Line
2. Eating out is at once every two weeks for a family of four at a decent restaurant
3. Car Maintenance is for a Mid-sized Sedan. We usually service the car once every 2 months, but for ease of calculation, I divided the number by two and put out a monthly number

Yearly Expenses:

The following are expenses that we don’t do every month, but nonetheless end up doing at least once a year. Below is how the new tax structure is going to affect us.

S.NoExpense DescriptionMonthly Expense@ Existing Tax %@ New Tax %
1HealthcareRs. 25000Rs. 2500Rs. 3000
2Life Insurance PremiumRs. 6000Rs. 600Rs. 720
3Holidays & TravelRs. 50000Rs. 5000Rs. 6000
4JewelryRs. 50000Rs. 1000Rs. 2000
5Family Functions (Catering/Photography etc.)Rs. 20000Rs. 2000Rs. 2400

Note:
1. Let us hope and pray no one in our family falls sick. But, with a family in which there are children and old age people, this is inevitable. Scans, X-Rays etc.
2. The Service Tax hike is only on the Mortality Charges for Life Insurance Premiums. I have just taken a rough amount of Rs. 6000/- as amount that may be the mortality charges. The actual number may vary based on your age and the type of policy you have taken
3. Holiday and travel is calculated for a family of 4 on a minimum of 3 day trip by AC coach in Train


Actual Impact:

Existing Monthly Expenses: Rs. 1015/-
New Monthly Expenses: Rs. 1218/-

Calculate for the Year:

Existing Monthly Expenses for 1 year = Rs. 12,180/-
New Monthly Expenses for 1 year = Rs. 14,616/-

Existing Yearly Expenses: Rs. 11,100/-
New Yearly Expenses: Rs. 14,120/-

Net Taxes – As per Existing % = Rs. 23,280/-
Net Taxes – As per New % = Rs. 28,736/-


Net Increase in Taxes Paid in one Year = Rs. 5,546/-

Are you still thinking that the Service Tax hike isn’t going to affect you by much???

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