As rightly quoted by Ralph Waldo Emerson – “For every benefit you receive a tax is levied”. Taxes are now being levied on many transactions. However, education has always remained tax free. Our tax statutes have always spared education provided at primary and secondary levels. Under service tax law such benefit has been extended to even vocational training courses.
Even after introduction of the scheme of taxation of services on the basis of negative list, such benefits have not been withdrawn. Budget 2012 had implemented the scheme of taxing services as per the negative list, as a result of which, every service has been put to tax unless it is covered by the negative list of services enlisted under section 66D of the Finance Act, 1994 or the same has been granted a specific exemption from such levy. As the scheme suggests, no service tax shall be levied on the services falling under the negative list of services. Under the new scheme, where any activity undertaken by one person for another for a consideration has been taxed, the legislation has kept the services relating to provision of education outside the purview of service tax net through a specific entry provided under the negative list of services which covers the following:
- Pre-school and higher secondary education or equivalent;
- Education provided as a part of a curriculum for obtaining a qualification recognized by any law for the time being in force;
- Education provided as a part of an approved vocational education course
As a result, education at primary as well as secondary levels and education imparted for obtaining qualifications which are recognized by law have been kept outside the purview of service tax. Even education provided as a part of approved vocational education course has been kept out of the ambit of service tax. It is clear that no service tax has been levied on imparting education in order to ensure that education is available at nominal charges.
Here it is worth mentioning that the cost of education is not only affected by the tax leviable on the provision of education service but is also affected by the tax leviable on the services received by the educational institutions. Taking this into consideration, exemption has also been extended to specified services provided to specified educational institutions vide entry No. 9 of Notification No. 25/2012-S.T., dated 20-6-2012 (“mega exemption notification”) which originally granted exemption to auxiliary educational services and renting of immovable property service provided to or by the education institutions in respect of education exempted from service tax. The above exemption remained in force during the period 1-7-2012 to 9-5-2013. However, in Budget 2013 this exemption was restricted to services provided to educational institutions providing exempted education. That is, exemption granted to such services rendered by the educational institutions was withdrawn.
Before proceeding to analyse the impact of such amendment, it is relevant to first understand the scope of the phrase- ‘auxiliary educational services’ as defined in the mega exemption notification. The term ‘auxiliary educational services’ covers a whole gamut of services which are necessary and usually received by educational institutions for, and in relation to, imparting skill, knowledge, education, etc. to students as well as teachers. The definition also specifically includes certain 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, faculty or staff of such institution.
A close perusal of the definition of auxiliary educational services indicates that though various services used for, and in relation to, imparting education have been covered within its ambit, it does not encompass all the services received by an educational institution. In other words, all services received by an educational institution do not qualify for the aforesaid exemption. Only those services which are covered by the definition of auxiliary educational services or are in the nature of renting of immovable property service, have been granted the exemption. This would mean that there are certain other services which are not covered under the definition of auxiliary educational services and hence are not eligible for the exemption. For instance, construction and construction related services, web designing service, manpower supply service, etc. received by an educational institution are not covered by the definition of auxiliary educational services. It is also observed that no exemption has been separately provided to such services under the mega exemption notification. There are certain other services which may qualify as auxiliary educational services and doubts in this regard were raised by the industry. Many educational institutions and service providers rendering services to such educational institutions made representations to CBEC (Board) seeking clarification on the availability of exemption to such services in response to which Circular No. 172/7/2013-ST, dated 19-9-2013 was issued by the Board clarifying the scope of auxiliary educational services.
The Board in its circular had clarified that all the services provided in respect of education are exempt from service tax. The Board also mentioned few services in the circular which in their view were squarely covered under auxiliary educational services and hence were exempt under the mega exemption notification. The services mentioned by the Board included, hostel services, housekeeping services, security services, canteen, etc. According to the Board, such services are not taxable under the new regime.
Such interpretation given by the Board has raised another debate as to whether in light of the benevolent circular all services provided to educational institutions are exempted, or will it still be necessary for such services to first qualify as auxiliary educational services in order to qualify for the exemption. Also, the service providers to educational institutions and even educational institutions themselves were left with various doubts in their minds. The liberal interpretation of the exemption provided by the Board shows that there is a big gap in understanding of the trade and that of the Board. When the understanding as conveyed in the circular is seen, then the definition of auxiliary educational services as provided in the mega exemption notification becomes redundant. If the intention of legislature was indeed to grant exemption to all the services rendered to the educational institutions then there was no requirement for introducing the term - auxiliary educational services. Did the legislation intend to give the benefit only to limited services or was the benefit available to all the services provided to educational institutions? It can therefore be seen that in spite of Board’s Circular, the issue is not really free from doubt.
A harmonious construction of the entries is required to be made in order to understand the intention of the legislation. This is further justified by the fact that several services provided to educational institutions which are not covered by the definition of auxiliary educational services, have not been granted any other exemption elsewhere. This indicates that the exemption was restrictive in nature and was not meant to cover all services provided to the educational institutions. If all services were to be exempted then the definition of auxiliary educational service would become meaningless.
It has been held in plethora of judgments that an exemption notification should be construed strictly keeping in view the object and purpose of the notification. Hence in order to avail the benefit of exemption granted to the services provided to education institutions, such services should first qualify as auxiliary educational services. Thus, the service providers need to be careful while determining the availability of exemption to the services provided by them to the educational institutions. No doubt, the support of circular can be taken to avail the benefit in respect of services such as housekeeping, canteen, security, etc. Nevertheless, before availing the benefit of exemption of any services rendered to the educational institutions, due consideration shall be given to the definition of auxiliary educational services.
As already mentioned above, in Budget 2013, entry no. 9 of the mega exemption notification was amended. This amendment has drastically affected the education sector. At the time of its introduction, the entry granted relief to both the service providers as well as the educational institutions from levy of service tax on auxiliary educational services and renting of immovable property service rendered by them. The amendment made in Budget 2013 restricted the benefit of exemption to specified services received by educational institutions and the exemption available to specified services provided by educational institutions was taken away vide this amendment.
A careful examination of Budget 2013 documents indicates that the intention of legislature was only to withdraw the exemption to renting of immovable property service provided by educational institutions, and not to take away the exemption to auxiliary educational services rendered by educational institutions. However, the manner in which the amendment was actually carried out by simply deleting the word “or by” from entry no. 9 of the mega exemption notification, has not yielded the intended result. As a result, the services provided by educational institutions, except those specified in the negative list of services, have become susceptible to service tax.
Even after the amendment, can educational institutions still protect themselves from the levy of service tax? This seems possible if the specified services are rendered by the educational institutions bundled alongwith the main service of imparting education. This is a new challenge for the educational institutions to strategize ways and means to deliver these other services bundled alongwith education services falling under the negative list of services. Otherwise the educational institutions will have to charge service tax on such services adding to the cost of education which has never been the objective of law makers.
[ The author is a Principal Associate, Lakshmikumaran & Sridharan, New Delhi ]