The finance ministry on Wednesday decided to defer the levy of 10 per cent service tax on railway freight by three months.
The levy had to come into effect from April 1. It would now be in force from July 1.
"Service tax on railway freight has been deferred till July 1 because inflation rate has not come down to the desired level.
"Prices of items like coal, cement and steel may go up further if a tax is levied on their transportation by the railways. This may fuel inflation," a senior finance ministry official, who did not wish to be identified, told Business Standard.
The wholesale price based inflation stood at a 15-month high of 9.89 per cent in February. The official added the finance ministry would review the situation in June and decide whether the conditions were favourable to levy the tax.
The railways had last week raised freight rate on iron ore meant for exports by Rs 300 a tonne.
In Budget 2009-10 as well, the government had proposed a 10 per cent service tax on goods carried by the railways to provide a level-playing field to transport of goods by road. However, it exempted rail freight from service tax in September 2009.
In Budget 2010-11, Finance Minister Pranab Mukherjee announced that the exemption from service tax would be withdrawn.
The service tax, however, attracted an abatement of 70 per cent of the gross value of freight charged on goods (other than exempted goods). This translated to a tax on only 30 per cent of the value of transported goods.
The move to defer the levy of tax came after Railway Minister Mamata Banerjee put pressure on the government to waive off service tax as it had done in the previous year.
Rail ministry officials had also written to the finance ministry seeking withdrawal of service tax on rail freight. "New projects need Rs 80,000 crore (Rs 800 billion).
There are pending projects. If there is service tax, it will be very difficult to implement them. . . It will be difficult to go for new lines.
The Budget has levied Rs 6,000 crore (Rs 60 billion) as service tax," Banerjee had told Parliament during Question Hour recently.
