Service tax on Educational Services

As, Education being one of the priority sectors of the Government of India has been  kept  outside the purview of service tax net by including the same in the negative list of services. The main objective behind the same is to reduce the cost of education in India. Thus, in order to reduce cost of education in the country, services in relation to education have been kept in negative list as well as exempted vide mega exemption notification.2012 no 25/2012.

But, it is hereby pertinent to mention that “Education” has been one of the most controversial topics in Service tax. What constitutes education itself has varied meanings. Earlier also in the positive taxation regime, only services defined within the scope of “Commercial training and Coaching Services” were taxable. Thus, there left scope for the assessee as to what is commercial coaching and not education.

However, now only those services which are provided in the Negative list shall be exempted from service tax, else all activities in the field of education have become taxable. Finance Act, 2012, by way of inserting clause 12 under Section 66D has kept very limited activities outside the purview of Service tax i.e. which shall be excluded in the field of education. We shall examine each of these exclusions in the following paragraphs:

Pre-school education and education up to higher secondary school or equivalent:

The key term in the present exclusion is “education”. Thus, if services are provided in relation to “Education”, such services would not be chargeable to service tax. Further, for the understanding the meaning of word “education”, reference can be made decision of the Hon’ble Supreme Court defining the term education in the decision of “Sole Trustee, Loke Shikshana Trust Vs CIT {(1976) 1 SCC 254}. In this case, it was observed by the Hon’ble Supreme Court that “education” means systematic instruction, schooling or training given to persons in pursuit of education for the purpose of training and developing the knowledge, skill, mind and character.

The term “pre-school” and “higher secondary school or equivalent” has not been defined and thus would need to be understood in the parlance of their commonly known meanings.

“Pre-primary education" is the education imparted for the development of young children before they enter formal school to enable them to adapt to the social system of schooling.     

It helps in cognitive development of children at the early grades of primary education and it has strong bearing on attendance and participation of children once they enter primary school. Pre-primary education is provided to children of age group of 3-6 years. The best example of “Pre-primary education” is play-schools.

The said education has been excluded from the levy of service tax. It is immaterial as to whether such activity of pre-school education is undertaken by an individual, a company, a non-profit organization etc. In other words, the motive or form of person undertaking the education is not material in excluding the same from the purview of Service tax.

“Higher Secondary School examination” means any qualification equivalent to 12^th standard, +2, pre degree education etc. Further, it is pertinent to mention here that what is excluded, is the education provided upto such standards and not other facilities to the students studying in such classes. Also, it should be consider that only education upto 12^th class is excluded. Thus, dancing classes provided to students during the summer camps when charged separately and not forming part of curriculum, would be taxable.

Also, the Education Guide on Taxation of Services dated 20-06-2012 provides the following clarification in this regard:

4.12.2 Are services provided by boarding schools covered in this entry?

Boarding schools provide service of education coupled with other services like providing dwelling units for residence and food. This may be a case of bundled services if the charges for education and lodging and boarding are inseparable. Their taxability will be determined in terms of the principles laid down in section 66F of the Act. Such services in the case of boarding schools are bundled in the ordinary course of business. Therefore the bundle of services will be treated as consisting entirely of such service which determines the dominant nature of such a bundle. In this case since dominant nature is determined by the service of education other dominant service of providing residential dwelling is also covered in a separate entry of the negative list, the entire bundle would be treated as a negative list service.

On the basis of above mentioned understanding and clarification issued through the Education Guide dated 20.06.2012, one can assume that all formal education upto the level of higher secondary are excluded from the purview of being service.

Education as a part of a curriculum for obtaining a qualification recognized by any law for the time being in force

The above exclusion provides for exclusion of any education which leads to securing the qualification recognized by law. By recognition, it means those qualifications which are recognized by law as prevalent in India for the time being in force. Thus, the colleges and universities which are established to provide recognized degrees would not be liable to pay service tax on their respective degree courses.

However, such institutes might also be providing certain courses which are not recognised by law or they may have their own specialized courses  on which they provides their own certification, such courses shall not be exempted under the said clause.

Beside this, courses which leads to qualification recognised by law by the parallel colleges would also be exempt by virtue of present exclusion.

The inference can be drawn based on the decision in the case of “Malappuram Dist. Parallel College Association Vs UOI {2006 (2) S.T.R. 321 (Ker.)}. In this case, it has been held by the Hon’ble Kerela High Court that levy of service tax on parallel colleges is arbitrary and violative of Article 14 of the Constitution of India. Further, the levy of service tax for the services rendered by parallel colleges, which indirectly falls on students, but by simultaneously providing exemption to regular affiliated colleges allowing students therein to study free of tax, is patently discriminatory and violative of Article 14 of the Constitution of India.

Further, in order to clarify the above mentioned discussion, reference can be made of Taxation of Services-An Education Guide dated 20-06-2012 which provides the following clarification in respect of the exclusion under discussion:

“Only such educational services are in the negative list as are related to delivery of education as ‘a part’ of the curriculum that has been prescribed for obtaining a qualification prescribed by law. It is important to understand that to be in the negative list the service should be delivered as part of curriculum. Conduct of degree courses by colleges, universities or institutions which lead grant of qualifications recognized by law would be covered”.

Also, clause 4.12.6 of the Taxation of Services-An Education Guide dated 20-06-2012 provides the following clarification:

“If a course in a college leads to dual qualification only one of which is recognized by law would be the service provided by the college by way of such education be covered in this entry”

Answering this question, the CBEC clarifies the following:

Provision of dual qualification is in the nature of two separate services as the curriculum and fees for each of such qualifications are prescribed separately. Services in respect of each qualification would, therefore, be assessed separately. If an artificial bundle of service is created by clubbing two courses together, only one of which leads to a qualification recognized by law, then by application of the rule of determination of taxability of service which is not bundled in the ordinary course of business contained in Section 66F of the Act it is liable to be treated as a course which attracts highest liability of service tax. However, incidental auxiliary course provided by way of hobby classes or extra-curricular activities in furtherance of overall well-being will be an example of naturally bundled course. One relevant in such cases will be the amount of extra billing being done for the unrecognized component viz-a-viz the recognized course. 

In the same way clause 4.12.13 of the Taxation of Services-An Education Guide dated 20-06-2012 clarifies, if the educational institutions are providing qualification recognized by law for the time being in force and conducting admission tests for admission to colleges, such admission tests shall be exempt from levy of service tax.

Thus, the basic activity of education leading to a recognized qualification remains outside the ambit of being services.

Education as a part of an approved vocational educational course:

Vocational Education includes courses which intend to prepare persons for identified vocations/trades as per demand of emerging economy, industry or professions. Section 65B of the Finance Act, 1994 defines “approved vocational education course” as follows:

a. a course run by an industrial training institute or an industrial training centre affiliated to the National Council for Vocational Training, offering courses in designated trades as notified under the Apprentices Act, 1961(52 of 1961)

b. a Modular Employable Skill Course, approved by the National Council of Vocational Training, run by a person registered with the Directorate General of Employment and Training, Ministry of Labour and Employment, Government of India; a course run by an institute affiliated to the National Skill Development Corporation set up by the Government of India.

Thus, these are the specified courses which leave no scope for any interpretation as the courses which have been kept outside the ambit of being services are specified courses which need to be recognized by a specified body.

The Finance Act, 2013 has amended the definition of approved vocational education course as to include courses run by an industrial training institute or and industrial training centre affiliated by State Council of Vocational Training. However, the courses offered by an institute affiliated to “National Skill Development Corporation” were chargeable to service tax.

Recently the Central Government vide notification no. 13/2013-ST dated 10.09.2013 makes amendment in clause 9 of the notification no. 25/2012 dated 20.06.2012 as to include courses offered by an institute affiliated to “National Skill Development Corporation” in the Mega Exemption List. As a result, educational courses which is intend to prepare persons as per demand of emerging economy, industry or professions & offered by an institute affiliated to “National Skill Development Corporation” is covered within the scope of Mega Exemptions and thus, exempt from levy of service tax except for the period from 10^th May 2013 to 10^th Sep. 2013.

Further, services in relation to Education are also provided in “Mega Exemption Notification-25/2012 dated 20.06.2012. Exemption has been provided to the services provided to an educational institution in respect of education. Para 9 of the notification can be read as under:

(9) Services provided to an educational institution in respect of education exempted from service tax, by way of-

a. auxiliary educational services; or

b. renting of immovable property

On the reading of above-mentioned clause, it can be said that the said exemption shall be granted:

- To an educational institution

- in respect of education

- which is exempt from levy of Service tax

- by way of auxiliary educational services

- by way of renting of immovable property

- Services should be provided to an educational institution

- The term “educational institution” has not been defined either in the Act or in the Mega Exemption Notification. In common parlance we understand educational institution as places/ centers where educational instructions are imparted according to the specific norms/ and include schools, colleges and institutions of higher learning.

- Further, one of the most comprehensive definition in this regard is found in the Noise Pollution (Regulation and Control) (Amendment) Rules, 2000, which defined the term as follows:

 (e) “educational institution” means a school, seminary, college, university, professional academies, training institutes or other educational establishment, not necessarily a charted institution and includes not only buildings, but also all grounds necessary for the accomplishment of the full scope of educational instruction,  including those things essential to mental, moral an physical development.

Beside this, reference can be made to the Dictionary meaning of ‘Educational Institutions; which can be reproduced as under:-

‘Educational institutions means all institutions dedicated for education’

Thus, this term needs a comprehensive outlook and should include the entire institute and note mere classrooms. The words “educational institutions” are of very wide import and would include a university also. {S. Azeez Basha v. Union of India, AIR 1968 SC 662, 670. [Constitution of India, Art. 30(1)}.

Thus, it is crystal clear that not only schools, colleges but universities, boards will be regarded as educational institutions. The meaning of educational institution has to be interpreted in a broad sense.

Services should be provided by way of auxiliary educational services

The definition of ‘auxiliary educational services’ is given under clause (f) of part 2 of the notification 25/2012-ST. In terms of the definition, the following activities are auxiliary educational services:

a. any services relating to imparting any skill, knowledge or education, or

b. development of course content, or

c. any other knowledge – enhancement activity, whether for the students or the faculty, or

d. any other services which educational institutions ordinarily carry out themselves but may obtain as outsourced services from any other person, including following services relating to:

e. admission to such institution

f. conduct of examination

g. catering for the students under any mid-day meals scheme sponsored by Government

h. transportation of students, faculty or staff of such institution.

a. Any services relating to imparting any skill, knowledge or education

Such services would include all ancillary activities provided for the overall development of a student in an educational institution like music lessons, arts and culture classes, sports activities etc.

b. Development of Course Content

Development of course content is an involved part of evolving education. One cannot provide comprehensive knowledge to children without continuously updating the content which is being taught to such students. Thus, any service which involves development of such content would be covered under this category. This would involve not only development of new literature but new form for e.g. a chapter converted into audio visual form. Educational literary content includes writing books for students, pedagogy materials for teachers and academicians, making audio or visual representation of content etc. It includes development of teaching aids as well.

c. Any other knowledge-enhancement activity, whether for the students or the faculty

This inclusion covers a wide ambit of services which would make the learnings experience more enriching for the students. Thus, it would include all services which aim at:

a. Helping teachers by equipping them with a vast and latest repertoire of the books and techniques to support teaching along with updated knowledge about the best educational practices prevalent around the world. The aim is to enable teachers to convert learning into an enriching experience for students.

b. Helping students enhance their learning so they grow into responsible, contributing members of the society by helping them build certain core skills.  

d. Any other services which educational institutions ordinarily carry out themselves but may obtain as outsourced services from any other person including services relating to:

i. admission to such institution

ii. conduct of examination

iii. catering for the students under any mid-day meals scheme sponsored by Government

transportation of students, faculty or staff of such institutions

This part again a inclusive part and would include all activities in relation to education which an institution does itself but can outsource for effective management or operation of its education purpose. Such activities would range from digitization activities, management and operation of library, student counseling, student fee management, student grading etc.

e. Transportation of student or staff

This exemption is provided to transport of students and staff when provided to an exempted educational institutions. It is important to note that such exemption is not available when consideration is charged from students and staff directly by the carrier as in that case, services are not provided to an educational institution but it is provided to the staff/students. Earlier also, motor vehicle or maxi cab rented to an educational body, imparting skill or knowledge or lessons on any subject or field other than commercial training or coaching centre was excluded from levy of service tax under service rent-a-cab scheme.

f. Admission to such institutions

Admission to such institutions can be in form of counseling of prospective students in relation to courses or by way of conducting examination for admission etc. Beside this, it would be necessary to mention here that admission is a wide term. In other words, the department is required to issue clarification in order to clarify the above-mentioned term.

Services should be by way of Renting of Immovable Property

If any service is provided to an educational institution by way of renting of immovable property, such service shall be outside the purview of service tax under clause 9.  As an educational institution is required building, playground, parking lot, canteen area etc. in order to provide educational services. Thus, such renting by way of immovable property shall not be chargeable to service tax. Further, such immovable property would include the main institution building and also part adjacent to such building and used for the purpose of running an educational institution.

Earlier, not only services provided to an Educational Institution but also services provided by an Educational Institution by way of auxiliary educational services; or renting of immovable property were exempted from service tax. But, Finance Act, 2013 amended the clause 9 of Mega exemption notification 25/2012 dated 20.06.2012 and the said exemption has been restricted to services “provided to” educational institution in respect of education.

Now, this amendment is leading to many issues as auxiliary educational services means any services relating to imparting any skills, knowledge, education or development of course content or any other knowledge like enhancement activity, whether for the student or for the faculty, or any other services which educational institutions ordinarily carry out themselves may obtain as outsourced services from any other person, including services relating to admission to such institution, conduct of examination, catering for the students under any mid-day meals scheme sponsored by Government or transportation of students or faculty or staff of such institution.

With this amendment, host of services like services relating to admission to such institution, conduct of examination, catering for the students under any mid-day meals scheme sponsored by Government or transportation of students or faculty or staff of such institution when provided by an educational institution itself would become taxable. However, when such services would be outsourced by the educational institution to the third party, the same would be exempt.

The important point to consider here is that the end-user i.e. student will have to bear the burden of service tax on these auxiliary services even when the educational institutions outsourced such activity to the third party. The withdrawal of exemption will certainly lead to increase in the cost of education. Thus, the above-mentioned amendment is not in line with the objective of the Government. Moreover, there does not seem to be any sound reason for considering a particular activity as taxable or exempt depending upon who is service provider.

Now, we can wait to reinstate the exemption granted to the auxiliary education services when provided by the educational institution as reinstate for “National Skill Development Corporation” since levying of service tax on such services would definitely increase the cost of already very expensive education, which will again be very burdensome for the common man.