When inflation is on a decline, this could be bad news for policymakers. The headline inflation, or wholesale price-based inflation, had declined to 9.11% in November compared to 9.73% in the previous month.
However, commodities that have direct bearing on the common man, like milk, foodgrain, kerosene oil, cooking gas and motor vehicles have been exempt from the levy.
As per railway ministry's circular, finance ministry has given abatement of 70% of gross freight charged by railways. So effectively, the tax rate would be levied at 3%. Imposition of service tax will also attract education cess of 2% and higher education cess of 1% on the amount of service tax, raising the total rate to 3.09%.
The government will benefit as its tax kitty will swell with inclusion of around R1,000 crore in the form of service tax on freight.
However, the move could hit railways revenues a bit initially as there is likelihood of a minor reduction in movement of these items by the national transporter, a senior railway ministry official said. The four items contributed 70% to railways earnings during April-November 2011.
The decision has come after two-year long discussions between ministries of finance and railway as the two could not agree on the effective date till now.
While finance ministry wanted to charge service tax from the earliest possible to facilitate a level-playing field in goods transport sector, railway ministry was against the impost fearing it would fuel inflationary pressures in the economy.