Introduction:
Budget 2012 has extended a great benefit to educational institutions by providing exemption for renting and auxiliary educational services provided to or by educational institutions making many of their input services exempted from service tax. Everyone regarded this move as a great relief measure as this would indirectly lessen the cost of education. Tinkering to this exemption has taken place by both Budget 2013 and Budget 2014. All this was undertaken with a clarification to achieve rationalization but this spirit was rarely been felt in letters. A peep into this will give a fair idea of our Governments rationality in undertaking welfare measures.
Implication of Budget 2013 Amendment:
The main reason for giving exemption for these services 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 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. This is the explanation given for amendment in the explanatory memorandum issued along with Budget 2013.
With this objective, entry 9 of Notification 25/2012-ST was amended by Notification 3/2013-ST to replace the words ‘services provided to an educational institution’ instead of ‘services provided to or by an educational institution’. Assuming the literal interpretation prevails, the actual amendment had the effect of withdrawing exemption even on the auxiliary educational 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. Only God knows the logic in such interpretation but nevertheless this is the literal interpretation. In spite of many representations, CBEC vide its Circular 172/7/2013-ST dt 19.09.2013 has given a clarification on these exemptions but no attempt is made to give clarity on this issue.
Implication of Budget 2014 Amendment:
In Budget 2014, this exemption entry was totally revamped by replacing with altogether a new entry which is reproduced as follows;
“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”
Now the concept of ‘auxiliary educational services’ was completely taken away. All services provided by educational institutions to students and staff are exempted while the exemption for services provided to educational institutions is limited to four specified services. 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 for reasons of rationality. 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.
All services provided by educational institutions:-
Previously only auxiliary educational services are exempted. Now all services irrespective of their nature provided by educational institutions to students and staff are exempted. As discussed above, because of Budget, 2013 amendment, services provided by educational institutions are not exempted on the assumption that literal interpretation prevails. So these services may be interpreted to be taxable only for the limited period from 01.04.2013 to 11.07.2014. But 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 there is no clarity and there are great chances for huge litigation on this issue.
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 only offers such purely commercial coaching services are required to pay service tax. In fact, similar situation was prevailing under the erstwhile regime during initial stages of levy on commercial coaching services.
Subsequently, this arbitrariness was plucked by suitable amendments to levy of service tax on commercial coaching services irrespective of the nature of institution. Now this amendment has brought the same old legal position. This move certainly hampers revenue collection from educational institutions that offer other commercial coaching. Further, it may even cause turmoil in revenue collection from pure commercial coaching institutions as they may resort to challenge the levy on the grounds of equality in law under Article 14 of the Indian 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. This will be having some indirect 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 straightaway has bearing on the quality of educational services provided by educational institutions. These are not exempted now.
There are many educational institutions established on franchise model i.e. successful educational institutions sharing their brand name, curriculum, teaching concepts and techniques for royalty to others who provide infrastructure and administration support. 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 franchise owners as royalty and now with service tax levy, this would indirectly increase the fee payable by students. A suitable representation in this regard is required otherwise; this will be having worst possible effect.
Conclusion:
In view of the above discussion, now exemption to services provided to educational institutions is clearly restricted to specified four services. Further exemption to renting of immovable property services and knowledge enhancement services are withdrawn. As these two alone form substantial expenditure being incurred by educational institutions, this will indirectly increase the fee collected from students. A suitable representation is required to be made for extending exemption even to these two services also. In this scenario, it would be ideal to recall a thought provoking comment made by Kerala High Court in the case of Malappuram Distt. Parallel College Assn vs. UOI, 2006(002)STR321(Ker)— “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.”
CA Manindar Kakarla
CAclubindia
