Rail fares may face service tax

RUN UP TO THE BUDGET 2006

Move likely to fetch government Rs 1,000 crore.

The railways may be brought under the purview of service tax in the coming Budget. At the same time, the basic exemption limit for service tax may be raised to cover firms with turnovers of at least Rs 6 lakh, against Rs 4 lakh at present.

"The finance ministry is considering a proposal to impose service tax on passenger fares in this Budget," sources close to the development told Business Standard.

The move can make the government richer by over Rs 1,000 crore per annum. During the April 2005-January 2006 period, total passenger revenue of the railways stood at Rs 12,704.41 crore. Service tax at 10 per cent on the 10-month revenue would have fetched the government Rs 1,270 crore.

Although taxing a government department like the railways is akin to taking money from one hand and putting it in the other (the government kitty), the potential for revenue is huge as the hike may be passed on to passengers.

This is not the first time that the government has considered this option but due to passenger fares being a politically sensitive issue, the plan has not seen the light of day. The proposal was considered for the Budget for 2002-03 when Jaswant Singh was the finance minister in the National Democratic Alliance government.

According to the sources, service tax should be levied on both passenger and freight traffic, but the latter is expected to be left out due to the competition the railways face from road transport, and also to avoid inflationary pressures.

A hike of Rs 2 lakh in the exemption limit is being seen as a measure to keep service tax exemption at a reasonable level. With service tax collection growing at above 66 per cent, the hike is not expected to result in major revenue loss as the collection mirrors the growth in the turnovers of services firms.

Further, at the lower end, the compliance cost is high in relation to service tax collection as it is felt that businesses having a turnover of Rs 4 lakh do no make significant contribution.

This year, service tax collection has already grown by Rs 6,454 crore (66.2 per cent) to Rs 16,205 crore from Rs 9,751 crore in April-January 2005.

The government is set to exceed its service tax collection target of Rs 17,500 crore for 2005-06 and the tax is being looked at as a major revenue source. As a result of this, levying service tax on passenger fares is being considered a first step towards bringing the railways in the ambit of the tax.