The Union Budget proposal to levy a 10% service tax on railway freight may see a partial rollback, with the government planning to exempt sensitive commodities such as food items and fertilisers as it looks to arrest spiralling retail food prices.

A government official told ET that the finance ministry has asked the Indian Railways to identify a list of essential commodities that could be exempted from the proposed service tax.

The Budget 2009-10 had proposed to bring goods transported by railways and waterways under the ambit of service tax, bringing them on a par with the road sector. The tax is to kick in from a date notified by the government after the Finance Bill is enacted.

Railway minister Mamata Banerjee has already written to finance minister Pranab Mukherjee seeking a blanket exemption for railway freight, saying imposition of service tax could lead to an increase in prices of commodities.

The government official told ET on condition of anonymity that the finance ministry was unlikely to relent
completely, but may take a halfway measure such as exempting essential commodities carried by the railways from service tax.

The Indian Railways has its own classification of essential and non-essential commodities with agricultural products, fertiliser and sugar among others coming under the former. Of the railways total freight earning of Rs 54,293 crore in 2008-09, nearly Rs 12,000 crore was on account of these items.

The railways themselves carry some of these essential goods below cost. In 2008-09, the loss on this count was Rs 96 crore.

If the government goes by this classification, then over 50% of railway freight could escape service tax. However, it is learnt that the Central Board of Excise and Customs, the apex direct tax body, would prepare a separate list for service tax purposes, which would be notified after the passage of finance bill by Parliament.