Service tax on rail freight deferred by 3 months to July 1

Under pressure from Railway Minister Mamata Banerjee and concerned over rising inflation, the government has once again deferred a decision on levying service tax on transport of goods by rail to July 1.

This is the fourth time that the government is postponing a decision on service tax on rail freight which was to be implemented from April 1, 2010.

"The service tax on rail freight was to be implemented from April 1. We have deferred it by three months," a finance ministry official told PTI.

A formal notification in this regard would be issued this week, the official added.

In Budget 2009-10, the government had proposed 10% service tax on goods carried by the Railways, to provide a level-playing field to transport of goods by road.

It, however, exempted rail freight from service tax in September 2009.

Withdrawing this exemption, the Union Budget 2010-11 has proposed to levy service tax at 10% on "service provided in relation to transport of goods by rail" with effect from April 1, 2010.

Banerjee was upset over Finance Minister Pranab Mukherjee's Budget proposal to bring railways under the service tax net. Railway ministry officials had also written to the finance ministry seeking withdrawal of service tax on rail freight.

The tax would probably have resulted in an increase in freight rates between 6-7% in case the railways decides to pass it on to the consumers.

With high food inflation, which has again entered double digits, this would have further fuelled prices.

Food inflation crept back into double digits at 10.05% for the week ended March 12, while the overall wholesale price inflation stood at 8.31% in February.

The exchequer has already lost around Rs 800 crore in 2010-11 as the finance ministry decided not to levy service tax on transport of goods through rail this fiscal.