Ventilator to escalator push for universities
The size of the top 10 combined university endowments in American and British universities for the year ending 2018 is a whopping $250 billion. Endowments in leading universities are used to finance various development activities, financial aid, student scholarships, etc. The endowment investment returns finance such activities and are a major instrument in the financial markets. The ‘Yale model’ of investment developed by Swensen and Takahashi seems to be the most popular model due its portfolio diversity. The combined success of philanthropy and governance has made this North American-European model of university endowment financing university growth.
A similar endowment-driven model exists but less pronounced in Indian universities—public and private. The source of endowment the world over for public and private is identical, banking on alumni and corporate philanthropy. However, the rate at which such grants are doled out depends on various parameters, tax laws being an important one. The need of the hour is a re-look at the existing framework of tax laws in India and a possible reform to provide financial oxygen to the struggling universities that may not require funds now but need endowments to finance future progressive growth.
Existing laws provided tax incentives to donors, allowed institution to build a corpus for specific purposes, etc. However, recent Finance Bills have amended certain provisions of the Income Tax Act that significantly impact universities. The intent of the amendment is understandable but the impact of it needs to be understood and amendment be modified suitably to arrive at a win-win solution.
Finance Bill 2017 amendment disallows corpus donations made to other approved and eligible entities as application of income. These forces trust to engage in avoidable expenditure to meet the 85 percent application of income criteria. Trusts/societies/charities, etc. that have established educational institutions may be allowed to create internal fund/corpus exclusively for infrastructure and student development out of their non-accumulated annual income without any time limitation.
Such indigenously created internal endowment solely for the purpose of financing future infrastructure and student development activities should be allowed as application of income and stay as endowment without time limitation on a perpetual basis to support various educational activities during adverse times.
Another important rollback in Section 35(1)(ii) of the Income Tax Act is absolutely necessary. The Finance Act 2018 has phased out the accelerated deduction granted to research donations made to eligible institutions which shall be only 100 percent from April 1, 2020. This has been phased out at a time when corporates have just begun to look at financing university research and such donations were beginning to rise. The Finance Ministry can restore the provisions of 35(1)(ii) in a graded manner—175 percent deduction for donations up to `5 crore, 150 percent up to `10 crore, 125 percent up to `15 crore and 100 percent for donations more than `15 crore.
India’s march towards building world-class and research-driven universities need support through such exemptions to catapult university research and development supported by internal and external corpus grants to pull out research from ventilator and put it on escalator.
vaidhya@sastra.edu