Government-owned Indian Railways is fearing an increase in its tax burden when the goods and services tax comes into effect in April 2012. From this financial year, it will have to pay a concessional rate of 1 per cent excise duty on rolling stock but it fears the liability will go up, as it has been removed from the exempted category.
The railways have asked the department of revenue in the ministry of finance to review its decision to impose excise duty. The tax liability on account of the excise duty is at present Rs 130 crore annually. They have said the additional tax burden would add to the railways, financial woes, which is already battling major erosion in fund balances.
In Union Budget 2011-12, the finance ministry withdrew the exemption, enjoyed by railways for the past 15 years, and imposed a concessional 1 per cent excise duty on coaches, wagons and locomotives. “The reimposition of the excise duty will push up the cost of our rolling stock by Rs 130 crore annually. We have requested the finance ministry to reconsider the withdrawal of the exemption,” said a senior official from the Indian Railways.
The tax liability would be applicable to the 10,000 wagons the railways procures from the market. The duty would not apply on other rolling stock, including the 6,000 wagons, 3,000 coaches and 500 locomotives, which the railways manufacture in-house, since there is no sale taking place.
With the decision to impose tax liability on wagons coming in, the Railways fear a cascading impact on freight rates. “The 1 per cent concessional levy may look small but it will hit us. Our fear is that the government will continue to increase this outgo. Our cost of capital and the cost of carrying goods will go up,” former financial commissioner Samar Jha said.
Jha, however, said the tax credit system in the GST regime would dilute the overall impact of the duty to some extent. “The credit system will benefit us by offsetting the overall impact to some extent. Whatever tax is paid in earlier stages of wagon manufacturing will be subtracted from the final tax outgo but still the Railways will have to shell out Rs 130 crore,” he said.
Experts agree the finance ministry’s move could spell problems for the Railways even as the initial outgo may look miniscule in the overall scheme. “This small tax outgo may increase substantially once GST rolls in because then the tax rate on rolling stock would be the standardised GST rate, which could be as high as 16 per cent,” said Satya Poddar, Partner, Ernst& Young.
The Railways is also facing a 10.3 per cent service tax, though the department of revenue has refrained from notifying it, since service tax is a pass through and it will have an inflationary impact.