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15 Jun 2014

Too many exceptions under the Negative list of service tax leading to complications –specific reference to “Education services”

The service sector accounts for more than 50% of India’s GDP and hence the study of tax on services is of great relevance. As and when it comes into effect, the GST regime is expected to subsume service tax. Therefore, issues in the present scheme of things under service tax may impede functional efficiency of the new GST regime.

The Finance Act, 2012 is a very important enactment in the service tax regime as it moved from a positive list of services to a negative list. A new Section 66D was introduced to describe those services that shall not be taxed. Prior to the introduction of section 66D and the negative list, as many as 119 services attracted service tax. Now, other than those services that are listed under section 66D, all services attract service tax. The exemptions and exceptions must be understood well as they are causing many complications. “Educational services” is one such area.

Since 2012, it is a well settled law that primary, secondary and higher levels of education (including education imparted for obtaining qualifications which are recognized by law) are excluded from the ambit of service tax. To encourage and nurture the education sector, the benefit of exemption from service tax was extended to those providing services to educational institutions. These services are exempted by way of being described as “auxiliary education services”. Prior to examining the phrase” Auxiliary education service”, an understanding of the term “auxiliary” is important. The dictionary meaning of the term is supplementary or additional help or support. Thus, when applied to “education services”, the term may be used for services which provide assistance and support in the course of providing education service.

It is recognized that the section 66D and mega exemption notification have to be read together for the purpose of claiming exemption. The mega exemption notification 25/2012-ST dated 20.6.2012 defines the phrase “auxiliary educational services” to mean any services relating to imparting any skill, knowledge, education or development of course content or any other knowledge – enhancement activity, whether for the students or the faculty, or any other services which educational institutions ordinarily carry out themselves but 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, faculty or staff of such institution;

The referred definition is not a closed one. It covers a whole gamut of education services including admission, conduct of examination etc. Reference is drawn to the circular No. 172/7/2013 dated 19.9.2013 issued by CBEC in order to provide clarification on the apprehensions conveyed by a few educational institutions and organizations on the levy of service tax on certain services relating to education sector is very important. In para 3, the circular states that by virtue of entry in the negative list and by virtue of the position of the definition of auxiliary education service in the exemption notification all services relating to education are exempt.

So, what is education? It is an act or process of imparting or acquiring knowledge or skills through instruction, training and study. It involves admission, tuition, training and coaching in specialized disciplines by a recognized college or University. Access to library, laboratory or computing facilities is also covered under the scope of “education services”. It is pertinent to note that in the case of Delhi University vs Commissioner of Income Tax, the Hon’ble High Court of Delhi has ruled that even hostel charges and messing fees in residential educational institutions shall be considered as “education”.

The term “Education” is therefore of wide import, and not just restricted to class room teaching only. The phrase “in relation to” can also be understood by placing reliance on the judgment in case of Doypack Systems (P.) Ltd. v. Union of India 1988 (36) ELT 201 (SC) wherein the words ‘in relation to’ has been held to be equivalent to or synonymous with ‘concerning with’ or ‘pertaining to’, and as words of comprehensiveness which might both have direct significance as well as indirect significance depending on the context.

Despite being in the negative list, one has to interpret this lot to claim exemption which may or may not finally sustain. In the current education environment, technology up gradation is necessary in order to speed up and increase the efficiency of the institution. The question arises whether the customization and implementation of advanced computer software that enhances the efficiency of admissions or maintaining student records etc. can also be categorized as an “Auxiliary Education Service” for the purpose of availing exemption from Service Tax. It is debatable but going by the substance, as it is in relation to education, it may qualify. But this is not devoid of contradictory views.

The views expressed are the author’s personal views and should not be considered as legal advice or opinion.

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