Exemption to Auxiliary Educational Services - Missing Rationality
AUGUST 22, 2014
By Manindar Kakarla,CA
BUDGET 2012 extended exemption for renting and auxiliary educational services provided to or by educational institutions. Consequently many of the input services received by these institutions were out of service tax clutches along with their output services provided to students. Everyone regarded this move as a great relief measure as this would indirectly lessen the cost of education.
Tinkering of this exemption notification started in Budget 2013 and continues even today.
Implication of Budget 2013 Amendment:
The main reason for exemption is not to indirectly pass the burden on to the students. However, the only situation where the burden of service tax will not be passed on to the students is in case where any building or premises is rented to outsiders by educational institutions. Eg. A school has given a space for running a canteen within the school premises. If not exempted, the tax incidence will be borne by outsiders only. There will not be any indirect transfer of burden to students.With this objective, this entry 9 of Notification 25/2012-ST was amended by Notification 3/2013-ST to replace the words with 'services provided to an educational institution' instead of 'services provided to or by an educational institution'.
In the explanatory memorandum issued along with Budget 2013, it was clarified by that the exemption relating to services provided by an educational institution by way of renting of immovable property were withdrawn. Assuming that literal interpretation prevails, the actual amendment had the effect of withdrawing exemption even on auxiliary educational services provided by educational institutions and this has created lot of ambiguity regarding availability of exemption with respect to services provided by educational institutions like transportation of students, staff, canteen services etc. while the same services received by educational institutions from private parties are clearly exempted. After many representations on this issue, CBEC made a desperate attempt to keep the ambiguity intact despite issuing a Circular 172/7/2013-ST dt.19.09.2013.
Implication of Budget 2014 Amendment:
In Budget 2014, this exemption entry was replaced with a new one as reproduced below -
"9. Services provided,-
a) by an educational institution to its students, faculty and staff;
b) to an educational institution, by way of,-
i. transportation of students, faculty and staff;
ii. catering, including any mid-day meals scheme sponsored by the Government;
iii. security or cleaning or house-keeping services performed in such educational institution;
iv. services relating to admission to, or conduct of examination by, such institution"
With this new entry the concept of ‘auxiliary educational services' is taken away. Now, only four types of services provided to educational institutions are exempted. If one would compare this new entry with that of the old entry, the following are the key differences.
Renting of Immovable Property Services: -
Ever since levy is introduced on these services, services provided to educational institutions are exempt from service tax. Now this exemption is withdrawn. Rental cost is one of the major expenditure being incurred by educational institutions. Service tax levy on these services would have significant bearing on the fee charged from students. Any possible ambiguity/loophole that existed under this exemption entry was fixed in the previous budget only. Now, again under the guise of rationality, exemption is completely withdrawn.
All services provided by educational institutions: -
When original exemption was effective i.e. on 01.07.2012 only services of the nature of auxiliary educational services provided to or by educational institutions were exempt from service tax. Now, all services irrespective of their nature provided by educational institutions to students and staff are exempted. By virtue of this, all services provided by educational institutions including outsourced auxiliary educational services are exempted.
In view of the Budget, 2013 amendment, as discussed above, services provided by educational institutions are not exempted on the assumption that literal interpretation prevails. So these services are taxable only for the limited period from 01.04.2013 to 11.07.2014. The memorandum to Budget 2014, clarified vide para I(iii) under Service Tax as – "At present, all services provided by educational institutions providing educational services specified in the negative list to their students, faculty and staff does not attract service tax; this will continue."
Thus no clarity exists on the auxiliary services provided by educational institutions to students and there is fair chance for the revenue to take stand that these services are taxable during the interim period.
Because of this amendment, an educational institution providing partly recognized education (claiming exemption under negative list) and partly commercial coaching services can now claim exemption for their commercial coaching services to same students under this entry while an institution which offers purely commercial coaching services are required to pay service tax.
In fact, under the previous regime, when levy was introduced similar situation was prevailing as all service providers who offer any recognized education were kept completely out of service tax even though they were also providing commercial services. Subsequently, this arbitrariness was plucked by suitable amendments to levy service tax on commercial coaching services irrespective of the nature of institution. It seems that experience has not taught any lessons. This move certainly hampers revenue collection from educational institutions that offer other training or coaching on commercial basis. Further, it may even cause turmoil in revenue collection from pure commercial coaching institutions as they can very well challenge the levy on the grounds of equality in law under Article 14 of the Constitution.
Outsourced Services:-
Previously all outsourced services which the educational institutions ordinarily carryout by themselves but may find it worth outsourcing were exempt. Now only the specified services provided to educational institutions relating to transportation, catering, security, cleaning, admission, conduct of examination are alone exempted. As all outsourced services are not exempted now, this will be having some bearing on fee collected from students.
Knowledge Enhancement Services:
All knowledge enhancing services like imparting any skill, knowledge, education or development of course content whether for students or faculty were covered under the 'auxiliary educational services'. These services are critical and straight away have a bearing on educational services provided by educational institutions. These are not exempted now.
Presently many of the educational institutions are established on franchise model with successful educational institutions sharing their curriculum, teaching concepts and techniques. All these services though directly related to recognized education will now be taxed. A substantial portion of the fee paid by students would go to these franchise owners as royalty. Service tax levy on these services would indirectly increase the fee payable by students.
Conclusion:
One can hardly see any rationality in the amendments made with respect to auxiliary educational services. All these will only augment litigation & non-compliance.
In this scenario, I would like to share with the readers a thought provoking comment made by Hon'ble Kerala High Court in the case of Malappuram Distt. Parallel College Assn vs. UOI ,2006-TIOL-35-HC-KER-ST "There is certainly force in the contention of the petitioners that even if the State is not able to finance higher education as required under the Directive Principles of State Policy under Art. 41 of the Constitution, it should not deny and discourage opportunities for education by adding cost to it in the form of tax on education which will certainly disable the economically weaker sections from pursuing higher studies."
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