Income Tax at 30% is far lower than Service Tax at 10%!

On the first glance, a common man will feel that Income Tax (IT) which is 30% (highest income bracket) is very high and Service Tax (ST) which is at 10% is pretty ok. But go a level deeper and one will realise how high ST is! This is because ST is on Gross Receipts and IT is on Net Income!

Here’s one very basic example. Mr. A is an interior decorator with gross receipts of Rs. 50 lakhs annually. He will have to pay 10.2% (10% + 2% Education Cess) i.e. Rs. 510,000/- as ST.

For IT purposes, he will deduct all his expenses and arrive at net profit. Assuming that net profit is as high as 10% it will be Rs. 500,000/-. He will have to pay 30.6% (30% + 2% Education Cess) i.e. Rs. 153,000/- as IT! He can further reduce this liability to Rs. 122,400 by taking benefit of section 80C and investing in PPF, LIC, etc.

This makes it pretty clear that IT at 30% is far lower than ST at 10%! Even when compared with highest tax bracker, ST is more than 4 times IT.

ST was only 5% when it was introduced and only a few items were covered. Slowly it was increased to 8% and now it is as high as 10%! Now it also covers many more categories of services! At the rate the government is levying new taxes and changing older provisions in its favour I feel one day will come when we will have to pay taxes even for breathing!

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