It is illogical to strain a service that caters to the aam aadmi but excluding the Railways will compromise the tax system's efficiency
Trinamool Congress leader & Lok Sabha MP
"The gross budgetary support that the Railways will receive in 2012-13 is only Rs 24,000 crore. So, when the Railways itself is in need of financial assistance, how can it pay service tax?"
The Railways should certainly be exempt from service tax. It must be pointed out that the Railways, has always been paying service tax on items such as selling advertisement space, catering and so on but since these were part of its non-core activities, it had no major impact on the Railways' finances. But under the new service tax regime, Railways passenger traffic is not part of the negative list and, therefore, it has now been brought under the service tax net; travel by suburban and sleeper classes has, however, been exempted. Again, transport of goods, that is, freight, also invites service tax with the exemption of goods such as postal mail.
It must be recognised that the Railways, unlike transport systems such as airlines or luxury buses, provides transportation to the aam aadmi; it is indisputably the lifeline of our country. Therefore, the concept of levying service tax on such a service does not seem logical.
Moreover, as far as freight is concerned, the Railways transports bulk goods, foodgrain, coal for the power sector and so on. In a nutshell, it provides efficient transportation at least cost and keeps crucial sectors running. So, why should a service tax be imposed on such a service?
The Indian Railways as a sector, right from the time of its origins and till today, essentially provides a social service. Therefore, it has not been raising its passenger fares for the past eight years. The only exception has been this year; that, too, the fare increase was marginal and limited to some air-conditioned passenger classes. It must be understood that the Railways' operations on its passenger services does not earn it any profits, and in such a situation to impose service tax on it does not seem sensible.
It has to be emphasised that the Railways has to foot a massive bill annually (the figure for 2011-12 is Rs 16,620 crore) for its "social service obligations", that is, for running uneconomic services like rail lines on uneconomic routes. This bill is rising at a staggering Rs 1,000 crore every year and, despite this, we price these service way below the costs incurred because it falls under our social service obligations.
Considering the fact that the Railways transports foodgrain to drought-prone areas or runs "necessary" services for the Northeast, without which the entire supply chain for the region would be cut off; should the Railways be taxed for providing such services?
The finance ministry's argument is that the new service tax is part of a larger umbrella of tax reforms that are being introduced, including the Goods and Services Tax regime and exempting the Railways from it would disturb this entire structure. That may be so, but the fact that the nature of the service (Railways) and the clients that it serves are not going to change cannot be overlooked. Therefore, the legitimate demand of the Railways that it should be exempted cannot be ignored.
Passing on the service tax to passengers is not an option because it will be a burden on them. For the Railways to bear the burden is untenable because it is not in a financial condition to do so. The Railways, it should be highlighted, had asked for budgetary support from the Centre of around Rs 50,000 crore but it received only half that. The gross budgetary support that the Railways will receive in 2012-13 is only Rs 24,000 crore. So, when the Railways itself is in need of financial assistance, how can it pay service tax?
Since 2009, when the service tax on rail freight was first imposed, the Railways has had to approach the finance ministry every three months for exemption. It has now been exempted from paying service tax on AC passenger travel as well as freight till September 30. But this uncertainty cannot continue; the issue must be decided once and for all. It is unquestionable that the Railways provides a social service and should, consequently, be exempt from service tax.
As told to Kavita Chowdhury
Mahesh C Purohit
Director, Foundation for Public Economics and Policy Research
"There is no justification whatsoever for exempting service tax on first and air-conditioned classes of passenger rail fares. In fact, this is a mockery of the equity principle in the tax system"
Given an increasing and significant share of the service sector in GDP, taxation of services is extremely important. It helps broaden the tax base, reduces the regressivity of domestic trade taxes, makes these taxes more elastic, improves allocative efficiency and brings about a substantial increase in revenue.
Based on these criteria, the recent Union Budget announced the adoption of a system of negative list from July 1, 2012, under which only 38 services are exempt from payment of the levy. This is a very welcome step; especially being a forerunner to the introduction of the Goods and Services Tax.
In the regime of service tax based on the negative list, it is presumed that negative list would be as small as possible. Therefore, while preparing the negative list efforts have been made to exempt only those services that are provided by the government or by local authorities. Also, merit services like education, health care, public transport fall in this category. It also includes important economic services such as agriculture and animal husbandry. The list also covers services that are currently being taxed by state governments.
Any additional exclusion or exemption of services that does not fall in the categories mentioned here, such as the "core services" provided by the Indian Railways – namely "transportation of goods and passengers" – should not be allowed. There could be serious economic implications from such an exemption.
From the point of view of equity there could be a good case for exempting tax on second-class railway fare but there is no justification whatsoever for exempting service tax on first and air-conditioned classes of passenger rail fares. In fact, this is a mockery of the equity principle in the tax system. Taxing these services makes this levy more equitable because these services tend to be luxuries. Empirically, there is a positive relationship between income and proportion of consumption expenditure incurred on services. Hence, there is a strong case for taxing rail passenger fares in the first class and air-conditioned classes. Also, to have horizontal equity, there is no justification for exempting this tax on "transportation of goods by railways" when there is a service tax being levied by the central government on goods carried by road (in addition to the passengers and goods tax being levied by the states).
On grounds of allocative efficiency, it is important to understand that when any area of consumption is untaxed, the tax rate applied to other expenditures has to be higher to obtain the required revenue. This accentuates the distributional impact of exclusions and forces the government to raise the rates of other taxes which, in turn, increases other costs, including the efficiency cost. It is, therefore, apparent that the efficiency of the tax system will be reduced if such an exclusion were granted.
Also, on grounds of the productivity of the tax, it is important to keep in mind that the increase in rail passenger fares for the classes concerned and the freight for transportation of goods would have been of the order of 3.6 per cent only. This is because the tax would be levied on 30 per cent of the charges after a 70-per cent abatement. In fact, the exchequer gets about Rs 6,000 crore from the tax. Given the present economic situation in the country, this huge tax revenue would be useful even if it is utilised for helping the states. How could an empty central fisc afford to have fiscal prudence and dole out funds to states in financial difficulty?
Finally, it is important that all ministries of the central government as well as those of the state governments should follow the national objectives of the tax policy. The national objective of attaining inclusive growth is possible only when we have a rational tax structure that yields adequate revenue for supporting the states and also for making investments in agriculture, industry and infrastructure.