Lessening Burden of Increased Service Tax

(This column was first published on Value Research Online.)

Ever since the Union Budget was announced earlier this year, most people, especially the beleaguered middle class, had a niggling fear at the back of their minds—the increase in the service tax rate. It was announced by our revered FM that the service tax in the country would be hiked from 12.36 per cent to 14 per cent. The hike came into effect at the beginning of this month.

On the face of it, a 1.64 per cent hike may not seem like a too much to some people. On the other hand, to some other people, even the earlier 12.36 per cent tax was probably too much by itself. Why should I pay tax on some service when I’m already paying for the service itself, they’d argue. But there’s nothing one can do about that. After all, as the hackneyed Benjamin Franklin quote tells us, nothing else in our life is as certain as death and taxes. (I would like to add termites to death and taxes over here, but let’s leave that for another day.) We can’t do anything about the 14 per cent service tax that we now have to pay, but here are suggestions to lessen its burden on some of the services we generally avail.

Give missed calls. All of us have experience with this. We’ve given missed calls in the era of chargeable incoming calls on our cell phones. It might now be time to revisit those stone ages. Give a missed call and let the other person call you. Lesser outgoing call charges mean lesser service tax on your phone bill, after all.

Here’s another trick, many of us, especially the missed calls giving ones, would have experience with ordering soups in one-by-two quantities. You don’t want to have the whole thing, so you share one portion between two people. Some might even say that you end up getting more than half the bowl in each bowl of soup. Considering that speculation to not be conjecture, we can easily apply the method to other parts of our food orders as well. You know where this is heading—less restaurant bill means lesser service tax on it.

You can come up with such creative ways to pay less service tax when you avail other services in travel, banking, et al as well. To what extent these tricks will work is anybody’s guess. But the one place where not a trick, but a tweak will help you pay lesser service tax is a change in the method of investing in mutual funds.

The increased service tax is going to hike up the expense ratio of mutual funds as well. Service tax is levied on the management fee that a fund company charges, and also on the distributor’s commission that has now been brought under the service tax net. As a result, investors in the regular plans of mutual funds will be affected by the service tax levied on distributors’ commissions, over and above the one levied on fund management charges. The only way to get out of having to pay service tax twice is by investing in the direct plans of funds. Since there’s no intermediary involved in the sale and purchase of direct plans, there’s no second service tax to be bothered about.

Of course, there is anyway a strong case for the direct plans of funds, especially equity funds. But the case is even stronger now, with regards to lesser service tax to be paid. You might feel gauche in giving missed calls or ordering food portions in one-by-two quantities, but there’s nothing awkward about investing in the direct plans of funds. Lesser service tax is ultimately equal to higher returns, after all.

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