Passenger fares and freight charges will not go up immediately as the Finance Ministry on Monday issued a notification exempting the railways from 12 per cent service tax for three months till September 30.
"Government has exempted the core services provided by the Indian Railways, namely transportation of goods and passengers, from the levy of service tax.
"The exemption will remain effective for a period of 3 months, up to September 30, 2012," said a finance ministry statement.
Last week, Railway Minister Mukul Roy had written to Prime Minister Manmohan Singh, who is now looking after the Finance portfolio, requesting him not to introduce service tax on passenger fare and freight traffic from July 1.
The Finance Ministry has moved to a new regime of Service Tax based on negative list from July 1, under which only 38 services are exempted from payment of the levy.
Service tax on railway passenger travel and freight was introduced in the Budget for 2009-10 but was kept on hold due to the then Railway Minister Mamata Banerjee's opposition.
The exemption has been extended since then on quarterly basis.
Earlier, Roy had also requested former Finance Minister Pranab Mukherjee to exempt Railways from paying service tax.
Had the government imposed 12 per cent service tax on railways, passenger fares in all AC classes and first class would have gone up by 3.6 per cent.
As per the estimates, railways would have to bear a burden of Rs 6,000 crore (RS 60 billion) had it decided against passing on the service tax burden on the passengers.
The introduction of new Service Tax regime, based on negative list from July 1, would bring into net a host of activities like speed post and express parcel service of the post office, earnings of TV and theatre artists.