The finance ministry, for the fifth time, has deferred service tax on rail freight by another six months. The cash-strapped government is likely to take a hit of Rs 1,000 crore in a year due to this.

The deferment has come as a surprise since the ministry was expected to give effect to the tax after former Railways minister Mamata Banerjee demitted office after her victory in the West Bengal Assembly polls. Prime Minister Manmohan Singh now holds the railway portfolio.

The finance ministry had suggested the exemption given to the Railways from the service tax, till June 2011, should be allowed to lapse and tax be introduced from July 1. However, it has now deferred the 10 per cent tax till January 2012 without specifying any reason.

One reason could be the high inflation, which increased to 9.1 per cent in May from 8.66 per cent the previous month. Prices of items such as coal, cement and steel may go up if tax is levied on the service provided in relation to transport of goods by rail, said a finance ministry official.

The ministry has provided for abatement of 70 per cent of the gross value of freight charged on goods while levying the tax. The estimated loss of revenue would comprise over 1 per cent of the total service tax collection target of Rs 82,000 crore in the current financial year.

In the Budget 2009-10, the government had first proposed service tax on goods carried by the railway to provide a level-playing field in the goods transport sector. The ministry levies 1i0 per cent service tax (with an abatement of 75 per cent) on movement of goods by roads.

However, in September 2009, it exempted rail freight from service tax to deal with inflation. In the Budget 2010-11 the finance minister announced the exemption from service tax would be withdrawn. But the ministry has not been able to give effect to the tax due to opposition from Banerjee.