One more cess means you will be paying 15% in service tax from today: All you need to know

From Wednesday, the cost of most services, including eating out and your Uber ride, will go up at 0.5% of the total bill with the introduction of a new Krishi Kalyan Cess. This cess will be levied in addition to the prevailing service tax rate of 14.5%.

After introducing the 0.5% Swachh Bharat Cess in November, the Union Finance Minister announced in this year’s Budget that the government would levy a Krishi Kalyan Cess to finance activities related to agriculture and build a fund for the welfare of the farmers.

What your bill will look like

Starting today, here’s what the breakdown of the bill at a Delhi restaurant will look like:

*Total food bill: Rs 1,000
*Service charge (taken at 10%): Rs 100
*Subtotal: 1,100
*Service tax to be levied on 40% of the bill amount: 14% of 400 = Rs 56
*Swachh Bharat Cess (0.5% of 400): Rs 2
*Krishi Kalyan Cess (0.5% of 400 – for other services it’s 0.5% of total bill amount): Rs 2
*Value Added Tax (12.5% of subtotal): Rs 137.5
Total amount payable: 1,000+100+56+2+2+137.5= Rs 1297.50

Swachh Bharat suc’cess’?

While the new tax is only going to add an extra burden of Rs 2 per Rs 1,000 of the bill amount, the total share of taxes consumers have been spending on services has risen considerably over the past year.

While the Swachh Bharat Cess was proposed to fund activities related to Prime Minister Narendra Modi’s flagship cleanliness drive, it’s not without its own set ofproblems. Many contend that the stated purpose of the cess is too vague, which means that the funds collected – Rs 1,917 crore till February this year – could be used for purposes that may not directly lead to a cleaner country.

Moreover, a larger problem seems to be the fact that because it’s a cess, it is directly under the control of the central government. The money raised through this cess is being deposited into the Consolidated Fund of India, which means that the central government will decide on how it is to be spent.

“Central Government may, after due appropriation made by Parliament, utilise such sums of money of the Swachh Bharat Cess for the purposes of financing and promoting Swachh Bharat initiatives or for any other purpose relating thereto,” reads the FAQ put out by the Central Board of Excise and Customs.

Is the new cess any different?

Even though the money collected under the Krishi Kalyan Cess is not going to be deposited into a separate fund, the Finance Minister Arun Jaitley said in his budget speech that the funds will be used “exclusively” for agriculture-related purposes.

“Proceeds from this would be exclusively used for financing initiatives for improvement of agriculture and welfare of farmers,” he said.

However, the impact of the Krishi Kalyan Cess will beslightly lower on manufacturers because, in contrast to the Swachh Bharat Cess, they will get a rebate for cess paid on input goods at every step of the manufacturing process.

An excess of cess?

The government introduced two new cesses in this year’s budget. Apart from the cess for farmers, the government has also proposed a new Infrastructure Cess on vehicles in view of the mounting problem of pollution in Indian cities.

This cess will range from 1%-4%, depending on the size and kind of vehicle purchased.

One reason for the government levying so many cesses could be the fact that it has been forced to share more of its revenues with the states as part of therecommendations laid down by the 14th Finance Commission, which suggested that the government use tax devolution as the primary way of sharing resources with the states.

As the central government is left with fewer funds under its direct control, it has to find other means of financing the rising expenditure burden that results from implementing the 7th Seventh Pay Commission and One Rank One Pension. Since direct tax collections have failed to match up to expectations, the Union Finance Ministry seems to have resorted to cesses.