Highly placed sources in the ministry conceded that the fare hike looks imminent as railways could ill-afford to absorb the additional burden of Rs 5,500 to Rs 6,000 crore given its financial condition.
The sources said railway minister Mukul Roy had written a letter to finance minister Pranab Mukherjee last week requesting exemption for railways from paying service tax, but the request has gone unheeded so far.
While the railway board is believed to be finalising the modalities for increase in fares, they said a fresh request has been made by the board today to the finance ministry for a review.
The hike would put an additional burden on travellers on AC classes. Fares in AC-I and AC-II was increased by about 20% in this year's Rail Budget.
Service tax on passenger travel and freight was introduced in the general 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 but this time the Finance Ministry has decided to exclude freight charges and AC rail travel from the negative list, which gets service tax exemption.
With freight and passenger fares enjoying a 70% subsidy, the impact on the increase in freight charges and fares of First Class and AC-I, AC-II and AC-III will be 3.6%.