Impact of GST on service sector: Four tax rates of 5%, 12%

Impact of GST on service sector pic

Services, depending on their nature, have been placed under four tax rates of 5 percent, 12 percent, 18 percent, and 28 percent.

“The impact of GST on service sector in the short term could be inflationary as the tax rate would immediately shoot up to 18 percent.

However, going forward, it is expected that due to reduced cost, due to availability of GST credit on other items hitherto not available, the price of services will come down which will benefit the consumers,” said Sandeep Sehgal, director-tax and regulatory at Ashok Maheshwary & Associates LLP.

The service tax you pay on your insurance premiums will get replaced by GST. This will push up the overall tax burden. For example, the service tax on premiums of term/health plans will go up to 18 percent from 15 percent. According to an email from Birla Sun Life, the tax rate on different insurance plans will get revised:

DescriptionCurrent Service Tax RateGST Rate
Term/Health Plans15%18%
Unit Linked Insurance Plan (ULIP Plans on charges levied) 






Traditional/Endowment (1st Year)3.75%4.5%
Traditional/Endowment (Subsequent premiums)1.88%2.25%
Single Premium Plan10%18%
Single Premium Annuity Plan1.45%1.8%

Source: Birla Sun Life

Similarly, servicing your credit card dues and banking transactions where service tax is levied will also get costlier. The existing service tax rate of 15 percent will be replaced by 18 percent under GST.

Though telecom companies will get an input tax credit when GST is rolled out, the benefits may not be enough for the operators not to pass on the higher GST rate of 18 percent to customers. Many telecom operators have sought a reduction in the GST rate of 18 percent.

GST on the economy class air travel has been lowered to 5 percent from a service tax rate of 6 percent while that on business class travel, it has been raised to 12 percent, from 9 percent. However, airlines cannot claim the credit on aviation turbine fuel as it is outside the purview of GST.

Petroleum products including aviation turbine fuel (ATF) are outside the purview of GST. Rating agency ICRA said that these rate changes are not material, and will not have any major impact.

Stays at five-star hotels could also get costlier. The GST rate of 18 percent will apply to hotel rooms with a tariff ranging between Rs. 2,500 and Rs. 7,500. The highest tax rate of 28 percent is assigned to tariffs of Rs. 7,500 and above.

Currently, the domestic hospitality industry pays tax in the range of 18-25 percent, which includes luxury tax and service tax. Hotels and lodges that charge Rs. 1,000 a day or less are exempted from the GST, while those charging from Rs. 1,000 to Rs. 2,500 will be taxed at 12 percent.

Eating out could get cheaper in some cases. Under GST, service tax and value-added tax (VAT) charged at restaurants will be subsumed. Air-conditioned restaurants will attract GST at 18 per cent on food bill. Non-AC restaurants will attract a 12 per cent GST.

However, restaurants that have both AC and non-AC seating options will be charging service tax as per AC restaurants at 18 percent. According to Ansh Bhargava, head of growth & alliances at Taxmann, in the current regime, while dining at restaurants there are basically two rates of tax that are charged over and above the food value: value-added tax (12.5 percent to 14.5 percent in different states, service Tax (5.6 percent) on AC restaurants, Krishi Kalyan cess (0.2 percent) and Swachh Bharat cess (0.2 percent).

Ola and Uber rides could get cheaper. Transport services will be taxed at 5 per cent. This rate will apply to cab aggregators like Ola and Uber as well as those that currently pay a 6 per cent tax.

Train passengers may have to pay a bit more for AC and first-class travel. Though non-AC train travel will be exempt from GST, on AC and first-class tickets, the tax rate will get hiked from 4.5 percent to 5 percent.

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