Service tax on transport of goods by rail

The Government of India has implemented the service tax levy of 3.7% on transport of goods by rail, which is effective from October 1, 2012. This was introduced by the Finance Bill 2010 and was originally planned to be implemented on April 1, 2010, but was deferred by repeated notifications. However, in order to raise its revenue and plug the fiscal deficit (see here), the government has finally released a circular on September 26, 2012, imposing service tax on railway freight.

The circular clarifies that an abatement of 70% has been permitted on freight, hence the service tax will be charged on 30% of the total chargeable freight. The service tax would be calculated in the following manner:

1. Service Tax of 12% will be charged on 30% of freight  (equivalent to 3.6% on the total freight);
2. Education Cess of 2% on Service Tax will be added (equivalent to 0.072% on total freight); and
3. Higher Education Cess of I% on Service Tax will also be added (equivalent to 0.036% on total freight);

Therefore, the Total Service Tax implication will be (1) + (2) + (3) = 3.708% on the total freight. 

Thus, consider an example where total freight is freight is 200. Then Service tax will be 7.2, Education cess will be 0.144 and Higher education cess will be 0.072.

Certain commodities transported by rail have also been exempted from levy of service tax, as per Ministry of Finance notification dated June 20, 2012, such as petroleum products, relief materials for disaster victims, postal mail, defence or military equipment, agricultural produce, other food items such as flour, tea, coffee, milk products and edible oil and chemical fertilisers.

Apart from levy of service tax on railway freight, the government has also imposed service tax on passenger fares, and these combined measures have met with stiff opposition from other political parties (see here) as this will only increase inflation by driving up prices of commodities. This will be covered in the forthcoming post.