In a relief to schools and colleges in the state, the central revenue department has clarified that they will not have to pay service tax on auxiliary services like transportation, extra-curricular activities, canteen and hostels. This was communicated in a letter to the central excise and service tax department.

A finance ministry notification, in which 'services provided to or by' had been replaced with 'services provided to' had led to some educational institutions believing they would have to pay service tax for food, transportation, extra-curricular activities, conduct of special examinations and field trips. Educational institutions said they would have to pass the burden to parents, saying it could mean an annual increase of Rs 3,000 in school fees and Rs 5,000 in college fees.

When schools began receiving notices from the central excise department asking them to register for service tax, many sent representations to the revenue department seeking a clarification.

J M Kennedy, director of the tax research unit of the revenue department, wrote to excise department officials, saying "auxiliary educational services provided to an educational institution are exempt from service tax". For example, if a school hires a bus from a transport operator to ferry students to and from school, the services provided by the operator are exempt by virtue of the exemption notification, the letter explains. In addition to the services mentioned in the definition of auxiliary educational services, hostels, housekeeping, security and canteen services would also be exempt.

"Thus the apprehensions conveyed in the representations submitted by certain educational institutions and organizations have no basis whatsoever," Kennedy said. He wrote in response to clarifications sought by 13 institutions, including the Punjab Association, which runs the Adarsh Group of Institutions, HLC International and BVM Global in Chennai and SASTRA University in Thanjavur.

"I thank the finance minister for providing clarity and putting this service tax issue to rest. This is a huge relief to students whose cost of education is now undisturbed and for educational administrators who will now have more time to spend in class rooms than in court rooms," said S Vaidhyasubramaniam, dean of planning and development of SASTRA University.