Have you been noticing the creeping inflation in your restaurant bills, phone bills and travel agent bills? Well, put it down to the cess effect. After ushering in the 0.5 per cent Swacch Bharat Cess last year, the finance minister proposed the Krishi Kalyan Cess (KKC) in the February 2016 Budget. With effect from June 1, KKC adds on another 0.5 per cent to your service tax burden. After this latest addition, the service tax rate on all the services you use stands at 15 per cent.
What is it?
Unlike taxes, amounts collected via cess are meant be segregated in government accounts and used for a specific purpose. So KKC is to be solely used towards financing activities for the improvement of agriculture and farmer welfare. Although charged along with service tax, KKC is to be listed separately by your service providers on the invoice, as a distinct line-item and paid using a unique accounting code notified by the government.
According to the Receipts Budget, the Centre hopes to rake in service tax of ₹216,000 crore for FY17, of which revenues from KKC is budgeted at ₹5,000 crore. While this collection is not to be trifled with, one can expect KKC collections to rise with the services growth in future.
Why is it important?
The KKC is based on the idea that levying a cess on a thriving sector of the economy can help fund a lifeline to a sector which is in distress. India’s transition to a service economy from an agrarian economy picked up after the reforms in the early 1990s. Services now contribute around 58 per cent to GDP, around thrice the contribution from agriculture. But despite ranking second worldwide in farm output, India has a legacy of recurring farm distress. The problem is particularly acute this year after two consecutive years of monsoon failure. KKC will ensure that strong growth in services will automatically boost the kitty available to the Centre, for alleviating farm distress. Over the long-term, any improvement in agricultural productivity can help farmers earn higher income and consumers benefit from lower prices as a result of better supplies, keeping a lid on food inflation.
Why should I care?
While KKC may be an easy way for the government to generate additional tax revenues, consumers may have reason to be peeved about the rising indirect tax burden on their spending. Service tax, which essentially is a consumption tax, started out at 5 per cent in 1994 and has since climbed to 15 per cent this year. With GST on the horizon, it can be expected to rise further. With KKC kicking in, a host of services have turned costlier with immediate effect. Consumers now have to shell out more towards travel, restaurant bills and a host of other services. While service tax is not applicable to sleeper class travel, Indian Railways will impose KKC on all AC class tickets, freight and parcel services.
Though the intention of the government is laudable, there are no guarantees that KKC will materially improve the lot of the farmer or the consumer as yet. After all, past cesses levied to deal with national calamities, build roads or fund education, haven’t delivered great outcomes.
But we can console ourselves that this imposition is not steep. For every ₹1,000 worth of services bought, the consumer now has to shell out ₹5 more.
Don’t fret. It’s for the benefit of the Kisan who puts food on our table.
A weekly column that puts the fun into learning
Please follow and like us: