Cotton will be soon applicable for 12.36% service tax on transport and storage, resulting in price rise. Prices of cotton that's ginned and baled likely to rise as their transport and storage have been deemed ineligible for exemption from service tax by the finance ministry, P Chidambaram.

Consumer affairs ministry officials said that they are yet to review the clarification. They are concerned for cotton as it will have a larger impact and they are still working on it with the finance ministry, one of them said.

The finance ministry is of the opinion that agricultural produce, as per the service tax negative list, means anything that hasn't been processed at all or has only been subjected to treatment as is typical by a cultivator or producer that doesn't alter the essential characteristics but makes the commodity ready for sale in the primary market.

The clarification means farmers or merchants will have to pay 12.36% service tax on storage, loading, stacking, transportation etc of baled cotton, said Pritam Mahure of Pune-based tax advisory firm Lawgical Consultants. When there is no service tax levied on other essential agriculture products (such as wheat), this step is very strange" as consumers "are already feeling pinch due to inflation.

After a long battle with prices, inflation has only just slowed, giving the central bank some breathing space on interest rates amid a prolonged slump. High inflation and the state of the economy have been partly responsible for the erosion in the popularity of the United Progressive Alliance government, which is preparing for elections in a few months.

According to Chidambaram's letter, the finance ministry told Thomas that services related to agricultural produce that are in the service tax negative list, according to section 66D(d) of the Finance Act, can't be expanded.

Certain specified services relating to agriculture or agricultural produce are kept in the negative list. Baled cotton are not covered by the definition of 'agricultural produce' found in section 65 B (5)," according to the letter. Following the finance ministry's clarification, the Central Warehousing Corporation has instructed customers about the additional levy, with retrospective effect.