Bringing rail freight under the ambit of service tax is likely to lead to a hike in freight rates of several commodities transported by railways over the next few months

Railway minister Mamata Banerjee’s aim to woo passengers and logistics service providers (LSPs) through her Rail Budget suffered a major blow, when Union finance minister Pranab Mukherjee announced levying of 3% service tax on all freight movements by railways. According to a survey conducted by Shippingbiz360, 64% of the respondents feel that bringing rail freight under the ambit of service tax is a blow to the sector, while 27% feel the opposite. 9% of the respondents are uncertain about the same.

Ms Banerjee while presenting the Union Rail Budget last month had kept freight rates unchanged but bringing rail freight under the purview of service tax has put a question mark on sustaining old freight rates. However, freight rates for essential commodities such as fruits, vegetables, milk, grains and pulses have been exempted from the service tax net. Interestingly, Mr Mukherjee’s proposal levies service charge even on fertilisers on which Ms Banerjee had offered a subsidy of Rs 100 per wagon.

Service tax to impede rail revenues

According to Ranjan Paul, finance head of Rolex Logistics Private Limited, a small-sized logistics firm in Bengaluru, “The announcement comes at a time when diesel prices have been hiked. Levying of service tax, coupled with hike in diesel prices will hurt rail revenues significantly.” It is to be noted that major oil firms in the country have increased diesel prices by Rs 2.55 per litre, which is expected to increase fuel bill of railways by nearly Rs 596.7 crore per annum. Indian Railways consume almost 2.35 billion litres of diesel per annum.

“In order to recover its revenues, there is every possibility that railways may hike freight rates for goods transportation and pass the burden of the same on its clientele. This will particularly hurt trade of small and mid-sized players, who mostly depend upon railways for movement of commodities,” comments D Kumarasen, managing director of Uni Logistics Private Limited, a mid-sized logistics firm in Bengaluru. However, according to sources, the Railway Ministry has decided to write to Prime Minister Dr Manmohan Singh urging him to reconsider the imposition of service tax on rail freight.

Arup Choudhury