Service Tax in Affiliation Fee and Rent levied by Universities

Do you know, that the Hon’ble High Court, Karnataka in the case of the M/s Rajiv Gandhi University of Health Science vs. Principal Additional Director General and Ors. [Writ Petition No. 57941 of 2018 dated 26-Jul-2022] held that Service Tax on Affiliation Fee and Rent levied by Universities for other ancillary activities for providing educational services. In this write-up, let us have a look at the Service Tax that cannot be levied on affiliation fees & rent collected by universities. But before we shall be looking into the topic let us first understand what service tax is and under which statute it falls.

Quick Look

Any person or company that provides a taxable service is required to collect and pay service tax on the taxes given by that person or business to the Government of India. Service tax is one of the most often imposed types of taxes on services offered throughout India. In addition, Karnataka had ruled about the same Hon’ble High Court that service tax could not be applied to dues for university memberships and other expenses associated with providing educational services.

Meaning of Service Tax

According to the Finance Act, of 1994, the Central Government of India imposes a tax on services rendered in the country. Since it is an indirect tax, the service provider typically pays the tax and recoups the cost from the customer of the taxable service. However, there are some circumstances where the person or organization that gets the taxable service is accountable for paying the service tax.

The following are some situations where the recipient of the services is accountable for paying service tax:

• The recipient of such services in India is obligated to pay service tax when taxable services are delivered by overseas service providers without an establishment there,
• When an insurance agent provides services related to insurance auxiliary services, the insurance company is responsible for paying the service tax; however, when a goods transport agency provides taxable services for the road transportation of goods, the person who pays or is responsible for paying freight is also responsible for paying the service tax if the consignor or consignee falls under any of the seven categories listed below.
•  Factory
• Company
• Organization
• Society 
• Co-operative Society 
• A registered excisable goods dealer
• A Partnership Firm or a Body Corporate.

Concept of Taxable Services

A list of taxable services has been established under Section 65(105) of the Finance Act, of 1994, and almost all services offered in India are subject to service tax. The full list of taxable services can be found here. Some examples of taxable services include advertising, architects, chartered accountants, beauty salons, clubs, consulting engineers, cosmetic surgery, interior decorators, packaging services, real estate agents, restaurants, and security agencies.

Services not subject to Service Tax

The services on the negative list are those that are exempt from service tax. In addition to the negative list, the authorities may occasionally offer composition schemes, exemptions, and abatements. Healthcare services provided by a clinical facility or a licensed physician are some of the services that are exempt from taxes. Other exempt services include those that involve training or coaching in leisure activities related to the arts, culture, or sports, as well as those offered by restaurants, eating establishments, or mess facilities that do not have the proper permits to serve alcoholic beverages.

Additionally, the Government of India has exempted small service providers that earn less than Rs. 10 lakhs in taxable service in a year from the service tax regime in an effort to safeguard and support small service providers. Additionally, all taxable services offered to diplomatic missions for their official purposes as well as for their personal use or the use of their families who are employed as career consular officers or diplomatic agents in a foreign diplomatic mission or consular post in India are exempt from service tax.

Payment of Service Tax

Service tax payments may be done electronically using an e-payment facility, through specified institutions, or by checks. For service tax payments, Form G.A.R.7 (formerly known as the TR6 Challan) should be utilized. Individuals, proprietary businesses, and partnership firms can all pay service tax on a quarterly basis. In the event of companies, societies, or trusts, the service tax payments must be made on a monthly basis. If service tax is not paid when it is due, a simple interest charge of 18% per year will be added to the balance. A penalty is also applied in addition to the tax and interest, and it must be at least Rs. 100 per day that the failure persists or 1% of the tax per month, whichever is higher.

The amount of the fine, however, cannot be greater than the Service Tax due.

Service Tax in Affiliation Fees and Rent levied by Universities

In the matter of the M/s the Rajiv Gandhi University of Health Science vs. Principal Additional Director General and Ors., the Hon. High Court of Karnataka ruled that service tax could not be applied to dues and fees charged by universities for various ancillary services related to the provision of education.

Let us discuss this judicial pronouncement in detail:

• Facts of the case: Mr. Rajiv Gandhi University of Health Science (hereinafter referred to as ‘the Petitioner’) imparts education and the entire membership fee is accepted for the same. The Income Tax Department (hereinafter referred to as Respondent) has issued a Show Cause Notice (hereinafter referred to as SCN) proposing to levy service tax on membership fees, penalty/late payment penalty from the colleges affiliated to it, and also the rents from certain buildings let by the company it. Aggrieved by the same, this suit is filed.

• Petitioner’s claim: According to the provisions of Section 66D of the Finance Act, 1994 (hereinafter referred to as the “Finance Act”) and Notification No. 25/2012-ST of June 20, 2012 (services provided by an educational institution), consideration received for providing a service in the form of education within the curriculum for the acquisition of a qualification recognized for the time being under any law is exempt from service tax and thus the participation fee received by the petitioner is also exempt from service tax. The Income Tax Department has no jurisdiction to issue show cause notices proposing to assess service tax on the membership fee.

• Respondent’s Contention: He admitted that the consideration received by the institutions for services in the form of education for obtaining a qualification recognized by law for the time being in force is exempt from service tax. However, the membership fee received by the petitioner cannot be considered as part of the said services and is the consideration for services provided to private institutions by their association.

• Fact in Issue: Whether the petitioner is liable to pay service tax on the membership fee and on the rent received?

• Held: The Karnataka High Court in Writ Petition No. 57941 of 2018 dated July 26, 2022, held as follows:

• The negative list of Section 66D of the Finance Act is not subject to service tax. Clause (l) of Section 66D of the Finance Act applies to services provided by educational institutions and therefore these educational services are not subject to service tax. 
• Please note that the petitioner must be considered an educational institution providing education in its own right and also through its affiliated colleges. Therefore, the said universities would qualify as educational institutions and the services provided would not be subject to tax on the membership fees and other ancillary fees selected by the petitioner.
• Considering that some buildings are rented out for the canteen and the bank as part of the provision of education, the mentioned activity must be considered as an activity related to the provision of educational services and it is a service naturally linked to ordinary business as per Section 66 (F) (3) of the Finance Act and the rent received also deserves exemption once the activity of providing education by the petitioner is exempted from service tax.

Final words

Thus summing up, it was held that the negative list of services that are not subject to service tax is contained in section 66D, and clause (l) of section 66D includes educational services.
Petitioner – The University is established under the Karnataka State Universities Act, 2000, and Universities are established by the State to promote the development of education and conduct of higher education and research. To this end, apart from imparting education itself through its constituent colleges, it also admits educational institutions not administered by the university as affiliated colleges and in the process regulates the manner in which education must be imparted in the said colleges and also conducts examinations.
In doing so, it charges the mentioned colleges a membership fee for the provision of services for imparting education, and the university must be considered an educational institution that provides education by itself and also through its affiliated schools, and the services provided by the university by charging an affiliation fee must be considered as a service in the form of education as part of the curriculum for a qualification currently recognized by any law.

You can also connect to our Experts at Legal Window if you want more clarifications regarding the judgment of the Hon’ble Court and also for clear understanding between the same.