TAX OPINION ON APPLICABILITY OF SERVICE TAX ON PAYMENT OF ACCESS FEE OF DATA BASE

Excerpted from Circular No.172/7/2013 – ST  issued by TRU dated 19^th September, 2013

“          2.         The matter is covered by two provisions of the Finance Act, 1994. Section 66D of the Finance Act contains a negative list of services and clause (l) thereof reads as under:

“services by way of –

(i) pre-school education and education upto higher secondary school or equivalent;

(ii) education as a part of a curriculum for obtaining a qualification recognized by any law for the time being in force;

(iii) education as a part of an approved vocational education course;”.

            Further section 93(1) of the Finance Act, 1994, enables the Government to exempt generally or subject to such conditions taxable service of specified description. By virtue of the said power, Government has issued a notification No.25/2012-ST dated 20^th June, 2012, exempting certain services. Sl.no.9 thereof reads as follows:

 “Services provided to an educational institution in respect of education exempted from service tax, by way of,-

(a) auxiliary educational services; or

(b) renting of immovable property;”.

As defined in the said notification, "auxiliary educational services" means 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.

 3.        By virtue of the entry in the negative list and by virtue of the portion of the exemption notification, it will be clear that all services relating to education are exempt from service tax. There are many services provided to an educational institution. These have been described as “auxiliary educational services” and they have been defined in the exemption notification. Such services provided to an educational institution are exempt from service tax. For example, if a school hires a bus from a transport operator in order to ferry students to and from school, the transport services provided by the transport operator to the school are exempt by virtue of the exemption notification. 

 4.        In addition to the services mentioned in the definition of “auxiliary educational services”, other examples would be hostels, housekeeping, security services, canteen, etc. “

Place of Provision (POP) rules were introduced in service tax regime through Notification No. 28/2012 dated 20/06/2012 and made effective from 01-07-2012. The basic aim of these rules is to decide the tax jurisdiction for a given service.

Usually, there is a confusion how services received on internet platform e.g. buying of books, subscription to business news, downloading games etc. from a service provider located outside India is taxed? On this subject matter, this article is framed.

Basics about POP Rules:

Earlier, import and export of services rules were existing in service tax legislation for deciding the service tax implications on cross broader services.

The new POP rules will, on the other hand, determine the place where a service shall be deemed to be provided, in terms of section 66C of the Finance Act, 2012, read with section 94 (hhh) of Chapter V of the Finance Act, 1994. Under Section 66B, a service is taxable only when, inter alia, it is “provided (or agreed to be provided) in the taxable territory”. Thus, the taxability of a service will be determined based on the “place of its provision”.

The essence of indirect taxation is that a service should be taxed in the jurisdiction of its consumption. This principle is more or less universally applied. In terms of this principle, exports are not charged to tax, as the consumption is elsewhere, and services are taxed on their importation into the taxable territory. However, this is not easy to determine. For example, a person located in Mumbai may buy a ticket on internet from a service provider located outside India for a journey from Delhi to London.

Hence, certain services were categorically taxed in different manner compare to rest of the services.

Online information and database access or retrieval services:

Downloading internet data and information on paid basis falls under this service. The name itself suggests the service covers access and retrieval of online information or database. For example, many business units receives data from Bloomberg server and pays subscription charges to receive vital business information or statistics. The other example is more common where an Indian student under a distant course access exam resources and papers from a web portal of private tuition or university. Let us understand the definition in detail.

Para 5.9.5 of Education Guide published by CBEC after introduction of new regime of service tax throws a good light on

“Online information and database access or retrieval services”

“Online information and database access or retrieval services” are services in relation to online information and database access or retrieval or both, in electronic form through computer network, in any manner. Thus, these services are essentially delivered over the internet or an electronic network which relies on the internet or similar network for their provision. The other important feature of these services is that they are completely automated, and require minimal human intervention.

Examples -

i) online information generated automatically by software from specific data input by the customer, such as web-based services providing trade statistics, legal and financial data, matrimonial services, social networking sites;

ii) Digitized content of books and other electronic publications, subscription of online newspapers and journals, online news, flight information and weather reports;

iii) Web-based services providing access or download of digital content.

The following services will not be treated as “online information and database access or retrieval services”:-

i) Sale or purchase of goods, articles etc over the internet;

ii) Telecommunication services provided over the internet, including fax, telephony, audio conferencing, and videoconferencing;

iii) A service which is rendered over the internet, such as an architectural drawing, or management consultancy through e-mail;

iv) Repair of software, or of hardware, through the internet, from a remote location;

v) Internet backbone services and internet access services.

What is so unique about this service?

This service is one of the specified services of POP rules. Rule 9 covers this service and distinguish the taxability of it from rest of all other services.

Rule 9 of POP Rules 2012 says the location of service provider shall be the place of provision meaning by it shall be taxed in the country from where the service is sourced or provided.Hence, online information and database access/retrieval services if provided from outside India and received in India then it shall be exempt in India. POP Rule’s logic is the service provider is outside India. The earlier import of services rules used to tax these transactions but not the new POP Rules. It does not matter whether the payment is made in foreign currency or not. The determining factor is the source or place of service provision. Just like that, the online database access and retrieval service provided from India to other country are taxable to service providers in India even if the payments are received in foreign currency. The earlier export of services rules were used to exempt the said transactions as export services but not the new POP Rule 9. These exporters need service tax registration and pay tax in time. They may albeit enjoy Rs. 10 lakh exemption as a small scale service provider.

 Conclusion: Hence no Service Tax to be deducted and remitted on availing of service towards accessing of online database maintained by overseas service provided to Education Institution which have in turn used for imparting of training to its Students/Faculties.

 References:

1.Circulars No : 172/7/2013 – ST 

2.Rule No 9 of POP Rules,2012