A 3.6% service tax on Railways — scheduled to be levied from July 1 — is likely to push up freight charges and fares in first class as well as all AC classes.
Parcel rates that were hiked by 25% on Wednesday are also likely to be further raised.
“The government had given service tax exemption on goods carried by railways till June 30, 2012. From July 1, using railways to transport goods will come under service tax net,” said SK Goel, the Central Board of Excise and Customs chairman.
A Railways official maintained that the hike was not yet a foregone conclusion, as it was possible that Railways Minister Mukul Roy or his party boss Mamata Banerjee may step in to extract an additional period of exemption before the June 30 deadline.
He added that the Railways may also decide to absorb the additional financial burden, instead of passing it on to the passengers.
In the 2009-10 union budget, the Centre had proposed service tax on goods carried by the Railways. However, the implementation remained deferred due to opposition by Banerjee, the then railways minister.
Asked if the Railways had approached the Revenue Department for exemption from service tax, Goel replied in the negative. Before Budget presentation, the Railways had raised the overall freight charges by 20%.
Besides grains and vegetables, railways transport important items like steel, crude oil, coal and fertilizers. Industry fears are that high freight charges would fuel inflation.
Goel, however, maintained that service tax on freight would have only marginal impact on prices as the state-run transporter enjoys 70% abatement on gross freight charges.
An abatement of 70% means that effective service tax would be only about 3.6% as against 12.3% (including education cess).