Medical authority's leave fees non-taxable but inspection fees for private institutions attract 18% GST

AAR Kerala ruled on two fee collection scenarios by a medical education authority. First, fees collected from medical officers taking leave without allowance for private employment were held non-taxable, as granting leave stems from employer-employee relationships under service rules, not business activity. The fee serves as administrative deterrent measure per public policy, not consideration for any supply. Second, inspection fees from self-financing medical institutions for NOC/EC issuance were deemed taxable at 18% GST under SAC 999799, as these constitute regulatory assessment services enabling commercial educational operations, similar to affiliation services, not educational services to students.

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1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Authority for Advance Ruling (AAR) are:

(a) Whether the fees collected from Medical Officers, Nursing Staff, and Paramedical Staff under the Medical Education Department of the Government of Kerala for availing Leave Without Allowance (LWA) for private employment within the country or abroad are subject to Goods and Services Tax (GST)Rs. If yes, what is the applicable rate of GSTRs.

(b) Whether the fees collected from self-financing educational institutions for conducting departmental inspections and issuing No Objection Certificates (NOC) or Essentiality Certificates (EC) for starting new self-financing Medical, Nursing, Dental colleges, starting new courses, or enhancing seats attract GSTRs. If yes, what is the applicable GST rateRs.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Taxability of Fees Collected for Leave Without Allowance (LWA)

Relevant Legal Framework and Precedents:

The provisions of the Central Goods and Services Tax Act, 2017 (CGST Act), particularly the definition of "supply" under Section 7 and "consideration" under Section 2(31), form the primary legal framework. The CBIC Circular No. 178/10/2022-GST dated 03.08.2022 provides clarifications on the non-taxability of amounts recovered by employers as penalties or deterrents, such as forfeiture of salary or bond amounts, where no benefit is conferred in return.

Judicial precedent includes the decision in M/s Manappuram Finance Ltd. v. Assistant Commissioner-Central Tax and Excise, which upheld the non-taxability of notice pay recoveries, emphasizing that such amounts are not consideration for supply and Entry 5(e) of Schedule II applies only where a contractual arrangement exists to tolerate an act for consideration.

Court's Interpretation and Reasoning:

The AAR examined the nature and purpose of the fees collected under Government Order No. GO (Rt No. 2190/2003/H&FWD dated 22/07/2023), which imposed fees on Medical and Paramedical Officers availing LWA to restrict indiscriminate leave-taking due to acute staff shortages. The fees are not collected as a charge for any service rendered but as a deterrent or penalty to discourage misuse of leave provisions.

The Authority noted that the leave sanction itself is governed by Kerala Service Rules and is discretionary; the fee does not confer any special right or benefit to the employee beyond what is already governed by service rules. There is no contractual obligation on the part of the Directorate to tolerate the leave in exchange for the fee, negating the applicability of the deeming fiction under Entry 5(e) of Schedule II of the CGST Act.

The Directorate is not engaged in business activity in collecting this fee, and the payment is not made in the course or furtherance of business. The absence of any reciprocal benefit or supply means the fee does not constitute "consideration" and therefore does not amount to a "supply" under GST law.

Key Evidence and Findings:

The Government Orders establishing the fee and the CBIC Circular clarifying the non-taxability of similar deterrent recoveries were pivotal. The judicial precedent supporting the interpretation that such fees are not taxable under GST was also relied upon.

Application of Law to Facts:

Given the absence of a contractual supply, the fee is a regulatory penalty or deterrent and not a consideration for supply. The Directorate's role is administrative/statutory, not commercial, and the employee is not a business recipient. Hence, GST is not leviable.

Treatment of Competing Arguments:

While some may argue that the fee is a charge for tolerating absence, the Authority distinguished this from contractual tolerance under Schedule II, emphasizing the discretionary and regulatory nature of leave sanction and fee imposition. The absence of any new right or benefit to the employee was decisive.

Conclusions:

The fees collected from Medical and Paramedical Officers for availing LWA do not constitute a taxable supply under GST law. No GST is applicable on such fees.

Issue 2: Taxability of Fees Collected for Departmental Inspection and Issuance of NOC/EC to Self-Financing Educational Institutions

Relevant Legal Framework and Precedents:

Section 7(1)(a) of the CGST Act defines "supply" to include all forms of services provided for consideration in the course or furtherance of business. Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017, Entry 66, exempts certain educational services but only those provided by educational institutions to students, faculty, or staff, and only up to higher secondary level or pre-school education.

CBIC Circular No. 234/28/2024-GST dated 11.10.2024 clarifies that affiliation-related services provided by universities or regulatory bodies to private educational institutions are taxable at 18%. Judicial decisions such as the Telangana High Court ruling in Care College of Nursing and the Tamil Nadu AAR ruling affirm the taxability of inspection and affiliation fees collected from self-financing institutions.

Court's Interpretation and Reasoning:

The Directorate's inspection and certification services for self-financing institutions seeking to start or expand medical, nursing, dental colleges or courses are rendered for a consideration to business entities engaged in commercial educational activities. These services facilitate the institutions' business operations and are distinct from exempted educational services provided to students or faculty.

The Authority held that the exemption under Entry 66 is inapplicable as the services are rendered to the institution itself, not to students or staff, and are prior to educational activity commencement. The inspection and issuance of NOC/EC are regulatory but constitute a service for consideration and thus fall within the GST ambit.

The services do not fall under SAC 9992 (education services) but under SAC 999799 (Other services not elsewhere classified), attracting GST at the standard rate of 18% (9% CGST + 9% SGST).

Key Evidence and Findings:

The Government Orders fixing inspection fees, the CBIC Circular clarifying affiliation service taxability, and judicial precedents confirming the applicability of GST to similar services were crucial. The nature of the recipient as a business entity and the commercial purpose of the service were significant factors.

Application of Law to Facts:

The inspection and certification services provided by the Directorate to self-financing institutions constitute a taxable supply of service under Section 7 of the CGST Act. The applicable GST rate is 18% as per Notification No. 11/2017-Central Tax (Rate).

Treatment of Competing Arguments:

Arguments seeking exemption under educational services were rejected based on the nature of the service recipient and the purpose of the service. The Authority aligned with recent circulars and judicial rulings, emphasizing the commercial nature of the services and their distinction from exempt educational services.

Conclusions:

The fees collected for departmental inspection and issuance of NOC/EC to self-financing medical, nursing, and dental colleges or courses constitute taxable supply under GST and attract GST at 18%.

3. SIGNIFICANT HOLDINGS

"The collection of fees from Medical and Paramedical Officers for availing Leave Without Allowance (LWA) does not amount to a 'supply' under Section 7 of the CGST Act, 2017. The fee is a deterrent imposed as part of a broader public policy and does not involve any provision of goods or services, nor is it collected in the course or furtherance of any business activity. There is no contractual obligation to tolerate the act of taking leave, and the payment is not consideration for any service rendered. Therefore, no GST is leviable."

"The inspection and certification services rendered by the Directorate of Medical Education to self-financing educational institutions for issuing NOC/EC constitute a taxable supply of service under GST. These services facilitate commercial business operations of the institutions and are not covered by any exemption under Notification No. 12/2017. Accordingly, GST at the rate of 18% is applicable."

Core principles established include the distinction between regulatory deterrent fees that do not constitute supply and commercial services rendered for consideration constituting taxable supply under GST. The ruling clarifies the applicability of GST to government fees depending on the nature and purpose of the fee and the identity of the service recipient.

Final determinations:

• GST is not chargeable on fees collected from Medical, Nursing, and Paramedical staff for availing Leave Without Allowance for private employment.
• GST at 18% is chargeable on fees collected from self-financing educational institutions for departmental inspection and issuance of NOC/EC for starting new colleges, courses, or seat enhancement.

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