India restaurant
[Representational Image]Reuters

Eating out, phone bills and flying are set to become costlier as Finance Minister Arun Jaitley is most likely to raise service tax rate to 16-18 percent in the Union Budget on February 1 from the current 15 percent. 

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The expected move, as a precursor to the Goods and Services Tax (GST) rollout, would be an attempt by the government to bridge the gap between the existing service tax rate and the proposed tax slabs for the GST. The government has finalised four tax slabs under the GST, which will finally subsume central and state taxes such as excise duty, service tax and VAT. 

While the lowest tax rate is 5 percent, the highest slab will attract 28 percent levy for white goods, luxury cars, tobacco and aerated drinks. A majority of items like processed foods and soaps, oil, toothpaste and other consumer goods will be taxed between 12 percent and 18 percent.

The GST is scheduled to be rolled out from July 1 this year. 

However, some tax experts believe there could be different service tax rates with a lower 12 percent for basic services and a higher 18 percent for the rest. They say a higher service tax for the April-June period will fetch the government more revenue to meet its expenditure on schemes and programmes the government may be planning to contain the impact of demonetisation.

At the same time, before the GST gets implemented on July 1, a service tax rate closer to the GST rate will also help consumers avoid a greater price shock when the new national sales tax (GST) is rolled out. Most services, except primary healthcare, basic education and those in the negative list, will be covered by the GST. 

If Jaitley indeed increases the service tax in the upcoming Budget, this will be the third time that he will raise service tax rate. In 2015, the finance minister raised the Service tax from 12.36 percent to 14 percent. Later, a 0.5 percent Swachh Bharat Cess was levied on all services, taking the total incidence of service tax to 14.5 percent from November 15, 2015. In his last Budget, Jaitley imposed a Krishi Kalyan Cess at 0.5 percent on all taxable services to take the levy to 15 percent.