Campus hiring comes under the service tax scanner

Mohan R. Lavi

A clarification by the Department clearly mandates that in case academic institutions provide recruitment service, they would also be liable to pay the tax.

Courtesy Budget 2006, it is a certainty that the Goods and Service Tax (GST) would see the light of the day only in 2010. The four years in between are probably going to be used to make amendments in other legislation to enable a smooth transition to GST. One of the major taxes that would be affected by GST is service tax, and the Finance Minister promptly announced a move towards GST by hiking the service tax rate to 12 per cent in the Budget.

The number of services under the tax net now is 99, but it is hard to imagine what is not a service to an extent that one can say that what is not a sale or manufacture could be called a service. However, much work needs to be done before a smooth transition to GST happens for service tax.

Litigation in service tax is touching the levels of those in Central Excise. The Indian Institute of Management, Ahmedabad (IIM-A), for instance, is the latest to join the list of litigants against the service tax department.

It is no secret that the campus interviews held in IIMs annually are a high-profile event. Top-notch companies from abroad and in India descend on the campus to interview and select the cream of management graduates by offering them astronomical salaries.

The IIMs charge companies a fee for this $5000 from an international company and a maximum of about Rs 2 lakh from an Indian company. If one looks at the definition of a manpower recruitment agency as one that provides any service, directly or indirectly in any manner for recruitment of manpower to a client there can be no two thoughts on the applicability of the tax to IIMs.

A clarification by way of a Notification from the Department clearly mandated that in case academic institutions provided this service, they would also be liable to pay the tax. The jurisdictional service tax department has issued a notice to IIM-A demanding service tax.

IIM-A, however, is protesting the levy by stating that it is charging this fee only to lower the cost of education for the students, which could otherwise turn pricey. It is backing its claim of no liability by stating that it was very clearly specified to the Government, too, at the time of fee fixation. Of course, the fact that much has happened since is another matter altogether.

While the initial reaction of the IIMs has been to respond by stating that the tax is not leviable, to be on the safer side, they have also said that in case it is, they would collect it from the recruiters who visit their campuses. While there could be no tax liability for the international companies which scout and recruit candidates, Indian companies that do the same job could see the costs of recruitment going up by 12 per cent. The above case is a good example of the untapped potential under service tax. This is a service that has been in the statute book for some time but was not collected for the simple reason that it was not discovered/known. Having discovered it now, the Government should levy the tax on all services provided by manpower recruitment agencies rather than modify the law giving an abatement/exemption to recruitment services provided by academic institutions and more, particularly, the IIMs. Only then would the transition to GST be smooth and on time.

(The author is a Hyderabad-based chartered accountant.)

(This article was published in the Business Line print edition dated March 25, 2006)
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