New Delhi, July 2: The government today exempted railway fares from service taxes till September 30.
Confusion over passengers paying more arose because the railways were not in the negative list of 38 services that were exempted from the tax.
The negative list regime came into effect this month.
"The government has exempted the core services provided by Indian Railways, namely transportation of goods and passengers, from the levy of service tax. The exemption will remain effective for a period of three months, up to September 30, 2012," a finance ministry notification said.
Last week, railway minister Mukul Roy of the Trinamul Congress had written to Prime Minister Manmohan Singh urging him not to impose the service tax on passenger fare and freight from July 1.
The finance ministry, which is now being led by Singh, took the decision despite strained relations between the UPA and Trinamul Congress over the support to presidential nominee Pranab Mukherjee.
Had the government imposed the 12 per cent service tax on the railways, AC and first class passenger fares would have gone up 3.6 per cent.
Days before the budget presentation, the railways had raised overall freight charges by 20 per cent.
Earlier this month, parcel and luggage rates were hiked 25 per cent, which is likely to bring in an additional revenue of Rs 370 crore this fiscal. The railways had earned Rs 1,600 crore from parcel and luggage in 2011-12.
The government had proposed a service tax on freight and passenger fares in the budget for 2009-10.
However, it was deferred on several occasions because of opposition from Trinamul Congress chief Mamata Banerjee. The exemption has been extended since then on a quarterly basis.
The finance ministry has a target to mop up Rs 1.24 lakh crore in the current fiscal from service tax compared with Rs 95,000 crore in the last fiscal.