Service tax applicability rules for preschool education business in India

Want to start your own preschool business in India? Opening a preschool in India is a business, and in any business you should pay proper attention to tax rules in order to avoid messing up things at a later stage. So, what is service tax? What are the service tax rules for preschools? Are educational institutions like play schools exempted from service tax?

In India, preschools come under the negative list for S.T. but do you know what does it actually mean? Where can you get the tax department circular on service tax applicability rules for play schools?

Is preschool business exempt from service tax in India?

Service Tax was introduced by inserting Article 268A in the Constitution of India, and the levy of the same was brought into effect from 1st July, 1994. ¹ It is administered by the Central Excise & Service Tax Commissionerates and the Service Tax Commissionerates, which in turn fucntion under the Central Board of Excise and Customs (CBEC). The whole structure is managed under the Department of Revenue, Ministry of Finance, Government of India. It is levied in the entire country, apart from Jammu and Kashmir.

As per the tax laws in India, a service can be exempted from paying service tax for either of four reasons: if a service is part of a negative list under section 66D of the Finance Act, if it is covered under the Mega Exemption Notification, if it is exempted under a specific notification, or if it is one of the services rendered in non taxable territory. Preschool education comes under the first two rules. On the one hand it is one of the items in the negative list, on the other, it is covered under the mega exemption notification.

However, please note that commercial training or coaching centres are not exempted from service tax. The CBEC has defined Commercial Training or Coaching Centres as

[A]ny institute or establishment providing commercial training or coaching for imparting skill or knowledge or lessons on any subject or field other than the sports, with or without issuance of a certificate and includes coaching or tutorial classes but does not include preschool coaching and training centre or any institute or establishment which issues any certificate or diploma or degree or any educational qualification recognised by law for the time being in force. ²

Preschools are exempted from service tax. Do you know how?

If you are not in a hurry, spend a few minutes to read about the details of these tax laws. Knowing a little more never hurts, and as a business owner, you should be always aware of the basic tax rules, acts, and clauses.

So, what do we mean when we say that preschool education is exempt from service tax under negative list, or service tax exemption under mega notification? What is 66D exemption? What do these phrases mean? What does the official tax-book say? Let us know discuss them in a little more detail, and refer to the authentic sources.

Exemption under negative list

From 1st July 2012, service tax was made mandatory for all services under section 65B(44). However, a list of exempted services was included under section 66D, from clauses a to q. This is called the Negative List of Services. Educational institutions ranging from the preschool level up to the higher secondary standard are exempted under this negative list, under clause (l) of 66D of the Finance Act, 1994.

Under Mega Exemption Notification

In June 2012, the clause 9 of the Mega Exemption Notification 25/2012 exempted auxiliary educational services from service tax, along with property rentings to or by an educational institution ³. However, this triggered a confusion whether properties rented out by educational institutions for purposes other than educational ones (for example, a commercial renting) was free from service tax or not. Therefore, vide Notification no 3/2013 dated 01/03/2013, the government changed the clause to provided to an educational institution from the earlier one that read provided to or by an educational institution. Thus, since 1st April that year, renting of immovable properties by educational institutions came under service tax.

However, this created further confusion whether educational institutes were required to pay service tax for auxiliary services as well. Hence, vide circular no. 172/7/2013 dated 19/09/2013, CBEC clarified that all services relating to education are exempt from service tax. Auxiliary services were also exempted from service tax. Typically, these include transporting, canteen facilities, security systems, housekeeping, and so on. For example, if the school hires a security agency to provide personnel for safeguarding the students, the agency will be exempted from service tax.

In the Union Budget 2014-15, the contemporary Finance Minister Arun Jaitley proposed to make changes for greater clarity in taxation matters. Accordingly, the above mentioned clause 9 was rephrased to provide a handy list of services that can be better understood with lesser confusion. It said:

Services provided,-

1. by an educational institution to its students, faculty and staff;
2. to an educational institution, by way of,-
   
   1. transportation of students, faculty and staff;
   2. catering, including any mid-day meals scheme sponsored by the Government;
   3. security or cleaning or house-keeping services performed in such educational
      institution;
   4. services relating to admission to, or conduct of examination by, such institution;

Thus, preschool education business is exempt from service tax in India under the mega exemption notification No.06/2014, clause 9(a) ⁴.

However, do consult a tax specialist, consultant, or lawyer before you act.

Here is a word of caution, in plain words.

Whatever is written here is for your general information only. Since these are legal matters, always consult a tax lawyer or tax consultant. Apply your best senses, act on your own, and forget whatever we have said, if needed. We will not be responsible for any troubles you might face in consequence of reading this article.

If you want a legalese jargon, proceed to read our formal content disclaimer, and term of use.

References:

1. For all Service Tax rules, refer to Chapter V, Finance Act, 1994. The CBEC official website provides a PDF.
2. Quoted from CBEC.
3. Source: http://www.cbec.gov.in/htdocs-servicetax/st-notifications/st-notifications-2012/st25-2012
4. Source: http://www.cbec.gov.in/resources//htdocs-servicetax/st-notifications/st-notifications-2014/st06-2014.pdf