Service Tax Increase Puts MSMEs in Tough Situation

The Service Tax increase is making the Indian MSMEs really uncomfortable. MSMEs in segments such as garments, laundry, real estate, restaurants and more would be badly hit by the increase in Service Tax Rate by 2%, said a leading Chartered Accountancy and Consultancy firm of Rajasthan adding that the move came at a wrong time.

The Central Board of Direct Taxes (CBDT) has said the new service tax of 14 per cent would be applicable from June 1. The notification comes after the passage of the finance Bill earlier this month.

According to Agarwal Sanjiv and Company Chartered Accountants (ASCOCA), the move comes at a time when the economy is already under pressure.

“This is not the right time as inflation is already high and economy is under a huge pressure. They could have done this at the time of Goods & Service Tax (GST),” said CA Neha Somani from ASCOCA.

The proposal to increase the Service Tax rate was floated by the government to facilitate the roll out of the national Goods and Services Tax, expected to be rolled out from April 2016.

There are around 3.61 crore MSMEs in the country, contributing nearly 37.5 per cent to the country’s GDP and employing close to 40 per cent of India’s total work force. Huge percentage of MSMEs belong to the services sector.

Service tax is levied on all services, expect a small negative list. Advertising, air travel, services of architect, certain type of constructions, credit card, even management, tour operator, laundry, hotels, restaurants are some of the important services which attract tax.

“The impact on Small and Medium enterprises will be that cost of Input and Input Services will increase. Cost of Production and Cost of Consumption will also increase. If the output services are not taxable, then CENVAT (Central Value Added Tax) credit cannot be taken.  This will add to inflation and may hit consumption on temporary basis,” Somani said.

She further said that the SMEs with mass consumption base would be affected the most. For example - garments, laundry, real estate, construction, restaurants, hotels etc.

Finance Minister Arun Jaitley in the Union Budget 2015-16 speech had announced an increase in service tax from 12.36 per cent to 14 per cent for 2015-16. It had also announced widening of the definition of service tax.

The service tax is currently levied at the rate 12.36 per cent including education cess.