Public and private spending on education and tax incentives to educational institutions has been the twin-engine powering transformation of knowledge societies worldwide. While imparting education has been considered a State duty, many countries have allowed private educational institutions to share the burden and discharge public good on the state’s behalf. There is policy consistency in the treatment of budgetary expenditure on education by the sovereign powers and the statutory exemption on income received by private educational institutions. While on the budget allocations, there is always an Oliver who asks for more, on the income exemption, there is another who asks for more. While one asks for more budgetary allocation, the other, like me, asks for more but reasonable exemptions. It’s the second Oliver writing further.
There is global parity among governments in treating the income of educational institutions—schools, colleges and universities. They have exempted the income received by approved educational institutions from federal income tax. Indian tax law is no exception to this global convention. While governments of many countries spend a substantially higher share of GDP on education, India still lags. The allocation of 6% of GDP to education, as recommended and advocated since the Kothari Commission in 1964–66, is still a distant reality. This has also been reiterated by the National Education Policy 2020. But with a challenging tax-GDP ratio, such an allocation will take more time due to expenditure-side constraints. However, on the exemption side, there is room for improvisation to provide much-needed relief to educational institutions. Here are some data and facts before I put forward my budget expectations.
The National Association of College and University Business Officers and the Teachers Insurance and Annuity Association of America conduct an annual study on university and college endowments. From its recent report, the combined value of major universities’ and colleges’ endowments end of June 30, 2021 is a whopping $825 billion. The top 10 universities’ endowment is about $350 billion. Harvard tops the list, followed by the University of Texas, Yale, Stanford, Princeton and others. The study also reports a 35% boom in University endowments with a median return close to 30% as against a median return of 1.8% end of fiscal 2020. This 30% annual return from the endowments alone is more than the most recent union budget allocation on education. While returns are unpredictable, the size of endowments is worthy of policy attention during pre-budget times. There is a possibility for Indian universities to create such fat endowments or corpus, provided the forthcoming Union Budget amends specific provisions of the Income Tax Act.
Charitable organisations (under Section 10(23c) or 12AA of the Income Tax Act) running educational institutions should be allowed to create internal corpus not exceeding 10% of total receipts every year, and such internal corpus need not fall under Section 11(2) of the Income Tax Act, 1961. Suitable amendments be made under Section 11(2) for the application of this corpus while waiving the maximum permissible period of 5 years. This provision, in addition to the existing 15% accumulation of non-applied income, will go a long way in building institutions with long-term vision. The current 15% accumulation is just adequate to compensate for wage and salary increases, spiralling operations and maintenance costs of existing infrastructure, removal of obsolescence in basic teaching and research infrastructure, etc., with very little room for massive growth in the positive direction.
The provision to create an internal corpus/endowment shall certainly provide an assured source of annual income, which can be earmarked for strategic development through capital expenditure, teaching and student incentives for research and innovation, free-ships and waivers, etc. This internal corpus/endowment may also be subject to the same level of scrutiny as per the provisions applicable to the regular receipts of Charitable Trusts/Societies under sections 11, 12 and 13 of the Income Tax Act. This will ensure that not only the money stays within the system but also the annual endowment income created will be utilised for advancing education and, more importantly, deter institutions from engaging in avoidable expenditure to meet the 85% target on the application of income.
The splurge of economic activity and the banks’ hesitancy to provide credit facilities to Trusts running educational institutions at competitive rates is creating a crowding out effect making access to long-term credit capital challenging. While the Centrally Funded Technical Institutions have formal access to the Higher Education Financing Agency (thanks to the 2017 Union Budget), others do not have such benefits despite doing comparably good work. It is also not a good practice to increase tuition fees in the name of expansionary financing.
Under these circumstances, along the lines of HEFA, it is requested that a bank consortia-based lending is given to the top 100 NIRF-ranked institutions through foreign currency loans that are available at competitive rates. The Government of India can guarantee such loans through the Ministry of Education with back-to-back agreements with the borrower institutions linked to their performance and high exit/default costs with stringent recovery mechanisms. This shall provide access to less expensive funds with longer repayment periods and a much-needed financial oxygen to progressive higher education institutions at the cusp of transformation, thanks to NEP 2020.
The recent judgments of the Supreme Court in the Noble Education Society & Ahmedabad Urban Development Authority cases have clearly laid down the law insofar as the operation of educational institutions and public charities are concerned. Armed with this double-barrelled artillery, the scrutiny by authorities will ensure that both requests, if favourably considered, will meet the highest standards of compliance by educational institutions with no fear of deviance. The terrain for progressive amendment is ready, and there is no better time appropriate than now and no better candidate other than educational institutions to whom the long pending budget relief needs to be sprinkled if not showered.
The recent foreign university draft regulations of UGC shall soon open the doors for foreign players, and Indian universities cannot be pushed to a non-level playing field. While we expect academic and administrative autonomy from UGC to level one side of the ground, where else can we go to level the other? In short: Education awaits the Finance Minister’s grace marks.
Dr S Vaidhyasubramaniam
Vice-chancellor and Tata Sons Chair Professor of Mgmt, SASTRA University
(Views are personal)