Indian Railways may have to pay service tax on revenues from advertising services that it provides to companies. The Central Board of Excise and Customs (CBEC) has directed its field officers to collect data on advertising services offered by Railways all over the country, a finance ministry official, who did not wish to be identified, said.

The CBECs move comes after several letters sent to the Railways by finance ministry failed to elicit any response. CBEC, the apex indirect tax body, and finance minister Pranab Mukherjee himself have written to Indian Railwaysthat earned about Rs 170 crore as revenues from its advertising business in 2008-09seeking details of the same and asking it to make payment of service tax on revenues earned from it.

Selling of advertising space is taxable and attracts service tax at a rate of 10%. Indian Railways, which became liable to pay the tax ever since the service became taxable in 2005, has not so far paid any tax on its earning from advertising.

Taxmen now want the Railways to comply to the law of the land and the data collected from the field would be used to assess the total tax demand outstanding against it.

With the finance ministry now training guns on it, the Railways will have to either pay the tax due or seek a special exemption from the levy of the tax.

Advertising became a significant focus area for the Railways under the stewardship of former railways minister Lalu Prasad Yadav. It all started after Southern Railways struck a deal with Pepsico to run Kurkure Expressa train that had packs of Kurkure, a salted snack from the company, painted on its entire exterior, from Bangalore.

Selling advertising space was not just restricted to signboards but tickets, reservation charts, benches and pillars were also in focus. A unique concept of 360 degree advertising solution that included on-board train branding was also devised.

The plan includes providing advertising space to companies, not just on the outside but also inside, on the bed linen and on plasma screens in railway compartments.