Service tax could be hiked to 14 per cent in the forthcoming Budget from 12 per cent in order to mobilise more resources to curtail the fiscal deficit, according to sources.

Service Tax if raised to 14 per cent will spike inflation with more services turning expensive . All services, with the exception of the 40-odd that figure on the negative list, will turn more expensive.   Since the services sector accounts for close to 60 per cent of the GDP, the government is keen to increase the tax mop- up from this segment.

Restaurants, hotels, beauty parlours and courier services will turn more expensive if the two- per cent hike is pushed through. Real estate developers also come within the ambit of service tax and are likely to pass the higher impost to flat buyers.

Coaching classes and training institutions will turn costlier as they come under the service net. However, the tax is not levied on school college and university education and approved vocational courses.

All government services that are provided without the payment of any charge are also excluded from service tax. However, Speed Post and parcels come under service tax and will become more expensive in case of a hike.

Betting, gambling and lotteries have been exempted from service tax as these activities are already being taxed by the state governments. Similarly, tax services are also exempt from the tax.

The new approach to taxation of services is intended to take the country a step closer towards the introduction of Goods and Service Tax (GST) with a more less uniform rate. Official figures show that service tax contributed a mere 14.2 per cent to total tax revenue during the financial year ended March 31, 2013.

The new government is looking at a higher collection from service tax in view of the large share that the services sector holds in the GDP. However, past experience has shown that the compliance record for service tax has not been very good.

According to official sources, the government would very closely focus on sectors prone to chronic service tax evasion like IT, real estate, consultancy, advertisement and security services.

Personalized Tax Returns Prepared & Filed by Tax Experts – Due date for FY 2013-14 (March 2014) is 31st July 2014, Also file for FY 2012-13, if not already, before you get a notice . Click here to choose your options.