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K.R. Srivats

Institutions would be required to fork out service tax on the lump sum payments received prior to July 1, 2003 for the coaching services (entire or part) provided after that date.

New Delhi , Nov. 10

A LARGE section of coaching and professional educational institutions in the country could be impacted by a clarification issued by the Finance Ministry.

Such institutions would be required to fork out service tax on the lump sum payments received prior to July 1, 2003 for the coaching services (entire or part) provided after that date.

Service tax is applicable on coaching services with effect from July 1, 2003.

The Finance Ministry has clarified through a circular that in cases "where the value of taxable service has been received in advance for a service which became taxable subsequently, service tax has to be paid on the value of service attributable to the relevant month/quarter which may be worked out on pro rata basis."

This clarification would settle doubts, raised mainly in respect of coaching and professional educational institutions, as to whether service tax is payable in cases where advance payments of value of services are made before the date on which the tax came into force, but the services (part or entire) are rendered after that date.

According to the Finance Ministry, the doubts appear to have arisen on account of Rule 6(1) of Service Tax Rules, 1994, which provides for payment of tax on the value of service received during a month/quarter, and in the current case (advance payments) under consideration, where no payment is received after the date on which the tax came into force.

The Finance Ministry has held that Rule 6(1) cannot be read in isolation.

It should be read along with the provisions of the Finance Act, 1994. The circular has made it clear that tax has to be paid on the value of taxable services attributable to the service provided in a month/quarter as and when it is received.

However, the Finance Ministry stands by its position that no service tax would be payable on maintenance contracts entered into before July 1, 2003, provided the invoices are raised and paid prior to July 1, 2003.

Such as position would hold good in case of continuing maintenance services, where there is an ongoing contract under which regular periodical payments are made.

"No similar exemption has been granted to any other service in case of advance payment," the circular said.

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