Using the Railways to transport goods would become more expensive from July 1, with the government bringing the sector under the service tax net. The move, while being inflationary, would further reduce competitive edge of the national transporter against the road sector.

According to official sources, the finance ministry does not want to further defer the levy as it goes against its plan to complete the service tax chain by bringing all activities barring a few in the negative and exemption lists under the tax net. Moreover, the levy has the potential to provide additional revenue to the tune of R1,000 crore to the exchequer.

In Budget 2009-10, the government had proposed service tax on goods carried by the railways to provide a level playing field to transport of goods by roads. However, it was deferred many times due to opposition from Trinamool Congress chief Mamata Banerjee.

The proposal was last deferred till June 30 on the request of railways that feared additional duty could fuel inflation with items like coal, steel and iron becoming expensive. Now with inflation relatively under check, it is felt that the duty proposal could be introduced.

A finance ministry official said that the proposed levy on the railways would only have marginal impact on prices as there would be a abatement of 70% on gross freight charged by railways. This would mean that service tax would be levied only on 30% of freight charges of the railways thereby bringing down the effective rate down from 12.3% (including education cess of 2% and higher education cess of 1%) to just about 3.6%.

"This level of duty is unlikely to be a big burden on consumers and would not fuel inflation," said the finance ministry official. After remaining high in most part of last year, inflation is hovering around 7% level.

In addition, the tax is proposed to be imposed only on transport of bulk of railway freight comprising items such as coal, steel, iron ore, cement and gypsum, which constitute 70% of the freight revenue of the railways. Commodities that have direct bearing on the common man, like milk, food grain, kerosene oil, cooking gas and motor vehicles is likely to be exempted from the levy.

In the Budget 2012-13, the government has increased service tax rate from 10% to 12% (from 10.3% to 12.3% after including education cess of 2% and higher education cess of 1%). The Budget has also introduced concept of negative list in service tax under which all services, except a list of 17 items, would be brought under the service tax net. Besides, there are 34 services which have been kept in the exemption list, which means these services will also not attract service tax.

As railways transport is not in the negative list and changes in this list could only be done with the approval of Parliament, the government considered it fit to bring the service under the levy. However, the government can still provide relief to the segment if it puts the service in the exemption list where items can be increased or decreased with a simple government notification.

The finance ministry has a target to mop up R1.24 lakh crore in the current fiscal from service tax in as compared to R95,000 crore in the last fiscal. The government will benefit by implementing the proposal as its tax kitty will swell with inclusion of around R1,000 crore in the form of service tax on freight.