Under pressure from Railway Minister Mamata Banerjee, the Ministry of Finance has decided to postpone the levy of service tax on railway freight to the next financial year, starting April 1. The service tax was to be levied from January 1, 2011.

“We had to issue a notification but we have decided to postpone the levy,” said a senior official. This is the third time that the finance ministry has decided to postpone the levy. The 10 per cent service tax levy had to come into effect from April 1 this year but it was postponed till July 1. At that time, a senior official had told that “service tax on railway freight has been deferred because inflation rate has not come down to the desired level. Prices of items like coal, cement and steel may rise if a tax is levied on their transportation. This may fuel inflation.”

In Budget 2009-10, 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In Budget 2010-11, Finance Minister Pranab Mukherjee announced that the exemption from service tax would be withdrawn.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 came after the railway minister put pressure on the government to waive service tax as it had done last year.

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