The Narendra Modi government is reportedly looking to raise the service tax by another two percentage points to 16% in the next Union Budget in a bid to meet its financial needs for the implementation of the seventh pay commission's recommendations.
In its previous budget, the Centre had increased the service tax, which is applicable to services like restaurants, travel, insurance, telephone bills, air travel and others, from 12.36% to 14%.
Finance Minister Arun Jaitley still has a scope to hike service tax to 16%, given a standard rate of 16.9% to 18.9% proposed by the committee on the Goods and Services Tax (GST) headed by Chief Economic Advisor Arvind Subramanian.
"Discussions and consultations are on; services is an area where we see room, as far as revenue sources are concerned. We do not know how global oil prices will behave next year, so excise duty is an uncertain source," a government official told Business Standard.
Apart from raising service tax to 14% this year, the government has started levying a Swachh Bharat cess of 0.5% on all services from 15 November.
"An increase in service tax rate could be a possibility next year. The government can look at revising the rates further up, as the standard recommended rate for GST is between 16.9% and 18.9%," said Saloni Roy, senior partner at Deloitte.
She also expects further increase in the Swachh Bharat cess from the current 0.5%.
Taking advantage of the sharp decline in global crude oil prices, the government raised excise duty on petrol and diesel price six times since November last year. The government earned revenue Rs 40,000 crore in the April- October period this year due to an increase in excise duty for fuel prices.
In November, the Seventh Pay Commission, headed by Justice AK Mathur, had recommended a 16% hike in basic salary and a 63% increase in allowances for government employees, taking the overall hike in salaries to 23.55%.
Although it is not yet clear when the government will implement the recommendations, the government's expenditure on salary payments to employees will go up by a whopping Rs 1 lakh crore upon the proposal implementation.
"Service tax increase could be a possibility, but it would not be simple mathematics," said Gautam Khattar, partner (indirect tax), PricewaterhouseCoopers.
In the first eight months of the current fiscal year, the government's revenue from service tax increased by 25% to Rs 1. 27 lakh compared to the same period last year. The government target to raise Rs 2.09 lakh crore from service tax in 2015-16.