On account of high inflation, the government is set to defer the service tax levy on transport of goods by rail for the fifth time.

We had planned to bring goods carried by the railways under the service tax net. However, with high inflation, we are left with no choice but to extend it (exemption), a finance ministry official told FE.

According to sources, the postponement could be from three to six months. The decision was taken by finance minister Pranab Mukherjee and it is learnt he has also briefed Prime Minister Manmohan Singh about it. Singh also holds the railways portfolio.

In April this year, the finance ministry had deferred the levy of service tax on goods carried by the Railways to June 30. The tax was to be imposed on transport of bulk of railway freight comprising items such as coal, steel, iron ore, cement and gypsum. These constitute 70%of the freight revenue of the railways.

The total revenue potential of the move was estimated to be around R1,000 crore in a financial year. An abatement of 70% of the gross value of freight charged on goods was also to be given, leading to a slightly less tax burden. The move could have affected the prices of key items used by the infrastructure sector. The headline inflation, as measured by the wholesale price index (WPI), rose to 9.06% in May from 8.66% in April on account of costlier fruits, petrol and manufactured goods.

Under pressure from Mamata Banerjee, the government had deferred a decision on levying the service tax by three months to July 1 in the beginning of the current fiscal. This was the fourth time that the government decided to postpone the imposition of the tax. In Budget 2009-10, the government had proposed 10% service tax on goods carried by the Railways to provide a level playing field to transport of goods by roads. It, however, exempted rail freight from service tax in September 2009.

Withdrawing this exemption, Budget 2010-11 had proposed to levy service tax at 10% on service provided in relation to transport of goods by rail with effect from April 1, 2010. However, Banerjee was unhappy over the proposal....