Service tax on rail freight was announced in the 2009-10 Union Budget, but protests from the TC which held the portfolio scuttled its implementation. The exit of TCs Mukul Roy from Rail Bhavan and CP Joshis takeover have finally cleared the way.
Passengers travelling in first class and AC coaches were brought under service tax from July this year, but the levy has since been kept in abeyance. Other passengers are exempt.
The railways pays hardly any tax at present and the dividend it pays is nothing but the interest payable on the capital at large (Plan expenditure) which is treated as loan in perpetuity. The inclusion of upper class passenger fares and freight under the service tax net is in keeping with the shift to a negative list approach for taxation of services, which means all services except a select few will be taxed.
While Indian Railways will be able to claim tax credit on various services and goods it purchases in its final service tax liability, those who transport goods by rail will be able to deduct the cost of transportation including taxes from their taxable income as business expenditure. However, the end consumer may have to bear the increase in cost due to the tax. The taxes may get reflected in the prices of steel and cement that depend on rail transportation.
We hope to implement the service tax on rail freight from October, said a senior government official, who asked not to be named.
Railway sources said the final call on applying service tax on rail freight rests with the North Block. It is is exempt from service tax till September 30. It is for the finance ministry to decide. But we would like rail freight to be exempt from service tax forever, said a railway ministry official, who too asked not to be identified. The move may also render rail transport of goods a bit less attractive compared with road transport.
The annual proceeds to the exchequer from the levy could be of the order of Rs 3,500 crore, going by the projected gross traffic receipts from freight and upper class passengers for the current fiscal.
Railways is in dire financial straits due to its inability to raise passenger fares, which gets cross-subsidised by freight. Statutory auditor CAG had earlier this year said the railways should improve its finances and rationalise both freight and passenger tariffs. CAG also recommended that railways should seek alternative sources to finance its capital expenditure.
With a Rs 1.24 lakh crore target for service tax collection this year, the government has moved to a negative list-based approach on this levy from July to widen the tax base. Revenue from service tax, which was just 3% in 2003-04 in the Centre s gross tax receipts, is expected to reach 12% of it as more services have come under this levy.