As everyone are aware that services provided by educational institutions by way of pre-school education, higher secondary school and education as part of curriculum are covered under negative list of services, no service tax is payable on such services. Apart from this, a number of auxiliary services relating to education are exempt from service tax under entry 9 of the Notification 25/2012-ST dated 20.06.2012.
Prior to 01.04.2013, all such auxiliary educational services provided by or to an educational institution are exempt from service tax. After that, vide Notification 3/2013-ST dated 01.03.2013, this entry 9 of Notification 25/2012-ST dated 20.06.2012 got amended to exempt only services provided to an educational institution. In this background this article aims to bring to the notice of the readers the probable drafting anomaly in this exemption entry, defeat of the objectivity in exempting auxiliary educational services and the consequent implications.
Rationale behind restricting the scope of exemption:
As education is one of the fundamental rights, Government adopted the policy to exempt pre-school, higher secondary school and other recognized education from levy of service tax by including these services in negative list. Apart from this, services provided by or to an educational institutions by way of auxiliary educational services as well as renting of immovable property are exempted from service tax under entry 9 of Notification 25/2012-ST dated 20.06.2012.
The most probable reason for giving this exemption to service providers other than educational institutions is that the services provided are ultimately merge or ancillary to the main education services provided by educational institutions which are exempt as they covered under negative list. In case these services are taxed, the burden will indirectly be passed on 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 of 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With effect from 01.04.2013, exemption was withdrawn for services provided by an educational institution. The reasoning given for this amendment in the explanatory notes explaining the amendments made by Finance Act, 2013 is that the amendment is made with a view to withdraw exemption for renting of immovable property service provided by educational institutions. Further this intention is clearly spelled out in the heading of Notification 3/2013-ST dated 01.03.2013 that effected the amendment, which is as follows;
“Renting of property by educational institutions, copyright for cinematographic films, restaurants, transportation of goods by rail, road and waterways and for charities — Jumbo Notification No. 25/2012-S.T. amended”
Therefore, it is very clear that the intention is to restrict exemption only with regard to renting of immovable property services provided by educational institutions to outsiders but not with respect to auxiliary educational services provided by educational institutions.
But on plain reading of the amended entry, it is very clear that services provided by educational institutions be it be auxiliary educational services or renting of immovable property services are not exempted. Unless the auxiliary educational services provided by educational institutions to students are exempted, providing exemption to services provided by outsiders to educational institutions would be of no use and is totally irrational as such attempt will make the students to bear the burden and simultaneously relieve the educational institutions from paying service tax on input services procured. It would altogether defeat the entire objective of exempting auxiliary services i.e. not to indirectly transfer the tax burden to students. All this might be due to drafting anomaly though it is not out of legislative intention.
As intentions behind laws do not prompt to firm conclusions and going by the premise that exemptions are to be strictly interpreted, has left the educational institutions in profound ambiguity in taking a call to charge service tax from students for any auxiliary services like transportation, extra-curricular activities and other knowledge enhancement activities not forming part of their recognized curriculum.
Shelter under the concept of Bundled Services:
Finance Act, 2012 has introduced the concept of bundled services for the purpose of determining the taxability in case where two or more services capable for differential tax treatment individually are provided in combination. Accordingly, in case where all the elements involved in a service are naturally bundled in the ordinary course of business, then the tax treatment as applicable to a single service which gives the bundle the essential character shall be applicable to all the service elements involved in such bundled service.
Services like transportation, extra-curricular activities and other knowledge enhancement activities not forming part of recognized syllabus are commonly provided in addition to regular recognized education by all educational institutions. So these are naturally bundled services which the essential character being recognized education which is exempted by way of entry in negative list. Therefore all these auxiliary services provided by educational institutions to students are also exempted when these services are bundled with main services i.e. recognized education covered under negative list.
Exemption to transport services provided by educational institutions to students:
Transport services even if provided independently otherwise as a bundle with educational services, it is worth to examine entry no. 23 of Notification 25/2012-ST dated 20.06.2012. This entry provides exemption to transport of passengers with or without accompanied belongings by a contract carriage for transportation of passengers excluding tourism, conducted tour, charter or hire. Further ‘Contract Carriage’ is defined to have the same meaning as given in section 2(7) of Motor Vehicles Act, 1988.
Accordingly, contract carriage is defined to mean a motor vehicle which carries a passenger or passengers for hire or reward and is engaged under a contract, whether expressed or implied, for the use of such vehicle as a whole for the carriage of passengers mentioned therein and entered into by a person with a holder of a permit in relation to such vehicle or any person authorized by him in this behalf on a fixed or an agreed rate or sum--
a. on a time basis, whether or not with reference to any route or distance; or
b. from one point to another, and in either case, without stopping to pick up or set down passengers not included in the contract anywhere during the journey, and includes--
i. a maxicab; and
ii. a motor cab notwithstanding that separate fares are charged for its passengers;
Thus from the above definition, a contract carriage is one which is engaged for hire or reward by a person for carriage of passengers mentioned or agreed at the time contract. The consideration can be fixed or agreed rate of sum either on time basis or distance basis. In either case, there should not be any stopping for pick up or set down of passengers not included in the contract.
Apart from this, it includes a maxicab and motor vehicle notwithstanding that separate fares are collected from its passengers. Further ‘Maxicab’ is defined to mean a vehicle intended to carry more than six passengers other than a driver whereas ‘motorcab’ is defined as a vehicle intended to carry not more than six passengers other than driver for hire or reward.
Therefore the definition of contract carriage is very wide and includes a motor cab and maxi cab if they operate without stopping to pick up or set down passengers not included in the contract though they charge a separate fee from each of the passengers.
In case of educational institution buses also, vehicle gets stopped only to pick up or set down students who are included in the contract. No other passengers are being transported. The fact that educational institutions may charge separate fee from students is not relevant as such cases of charging separate fee from each of the passengers are also specifically included in the definition of contract carriage.
What is exempted from service tax are the services provided by way of transport of passengers other than by way of tourism, conducted tour, charter or hire. In the instant case, the service is not provided as a part of tourism and the vehicle is not hired or chartered by any one person. Only a contract is entered into for to and fro transportation of students.
State Transport Authorities are giving separate registration for educational institution buses. This is because of the reason that such vehicles are required to comply with additional conditions to obtain permits. Further separate fee is prescribed for these vehicles making these different from other contract carriage permits.
But these are in substance contract carriage permits only. This is because of the reason that Motor Vehicles Act, 1988 provides for two types of registration only. One is stage carriage permit and another one is contract carriage permits. To add support to this, the following are the extracts given in websites of State Transport Authorities to indicate that the permits given to educational institutions are contract carriage permits only.
a) “Children are carried to educational institutions in the morning and returned to their homes in the afternoon in various modes of transport in Kerala. Many schools run their own educational institution buses labelled contract carriages. In some schools buses are hired by schools for facilitating movement of children. Group of parents contract autorickshaws and motor cars, tempo vans etc. to carry children.”
(Circular 29/2003 issued by Motor Vehicles Department of Kerala State Government:
b) The vehicles of Educational Institution registered under the Societies Act 1960 (21 of 1960) are issued contract carriage permit by STA. These vehicles are also exempted from road tax. For identification these vehicles are painted in golden yellow paint. Special provisions have been incorporated in Delhi Motor Vehicles Rules, 1993 for additional safeguards in respect of the safety of the children.
Therefore the transport services provided by educational institutions are also exempted from service tax even after 01.04.2013 onwards vide entry 23.
As discussed above, there seems to be a drafting anomaly in effecting amendment to entry 9 of Notification 25/2012-ST dated 20.06.2012. From the explanatory notes of Finance Act, 2013, as well as from heading of Notification 3/2013-ST dated 01.03.2013, it is very clear that intention behind amendment is to only restrict the exemption given to educational institutions when they provide renting of immovable property to outsiders but not the auxiliary educational services provided by educational institutions.
Further there is no logic for taxing of auxiliary educational services provided by educational institutions to students while the same services are exempt when provided by outsiders to educational institutions. Therefore, a clarification as well as a suitable amendment from CBEC is required in this regard. Otherwise, this could lead to prolonged litigation.
Coming to transport services provided by educational institutions, there are exempted by another entry i.e. 23 as they are of the nature of transport services provided by contract carriages. In case of other auxiliary educational services provided to students, these are exempt from service tax when shelter available under the concept of bundled services has been resorted to.
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