As the West struggles to overcome the global recession, India remains one of fastest growing economies in the world today. Such rapid economic development and the transformation to a knowledge-based economy have resulted in increased demand for educated and skilled workforce. To meet this demand, the government has set itself a formidable target of achieving a gross enrolment ratio (GER) of 21 per cent by the end of the 12th Five-Year Plan in 2017 against the current GER of 12.4 per cent, which is one of the lowest in the world.
The government’s ambitious target coupled with lack of adequate infrastructure for education facilities makes India one of the largest emerging education markets. Despite this, the education sector is not getting the kind of investment it should attract, especially, at the formal K-12 and higher education level. The catch lies in the heaps of regulatory hurdles one has to clear for establishing a formal educational set-up.
Education in India has traditionally been regarded as a philanthropic activity and is primarily driven by the government or few large Indian corporations as part of their corporate social responsibility (CSR) on a “not-for-profit” basis. Against this backdrop, the formal education sector is governed by a number of regulations framed by the Centre and state governments and regulated by a number of bodies like the All India Council for Technical Education (AICTE), the University Grants Commission, the Medical Council of India, the Central Board of Secondary Education and so on. Accordingly, such regulations require an educational institution to be set up either as a trust or a society or, in certain cases, as a Section-25 company (for instance, recently the government has allowed corporations to start AICTE-approved courses by setting up separate non-profit companies under Section 25 of the Companies Act). The regulations further require that any surplus generated while running an educational institution needs to be ploughed back to further educational objectives.
Though these regulations are in place, it is common to find institutions running on models in which a number of companies are set up alongside the trust or the society. Such companies provide services like school management, cafeteria, school stationery, uniform and so on. Nothing more than common sense is needed to understand that this is an indirect means of deriving profits, which is not possible in a formal set-up given the stringent regulatory provisions.
In the current situation in which it may not be lucrative for private sector players to invest in a formal “not-for-profit” set-up, the unregulated “for-profit” entities are attracting the bulk of investment. These entities are mostly engaged in providing educational services like test preparation, tutorials, corporate training, teacher training and so on. Career Launcher, Educomp, TutorVista, to name a few, are some of the biggest players in this sector. From the amount of investments that these companies have attracted in the recent past, it is evident that investors are bullish on the Indian education sector.
The ever-increasing demand for quality institutions also creates a need for foreign universities to set up shop in India. Foreign players would not only raise the bar as far as educational infrastructure is concerned, but would also provide the much-needed funds.
Under the extant guidelines, few options exist for foreign collaborations in technical education whereby AICTE permission is required to provide diplomas or degrees by a foreign university or institution or through a twinning arrangement in collaboration with an Indian university or institution. However, a number of stringent conditions regarding the mode of the set-up, accreditation, fee, student intake and so on need to be fulfilled.
Another issue that merits attention is the ambiguity surrounding the permissibility of foreign direct investment (FDI) in the education sector. There is no express provision that restricts FDI in education and, therefore, under the residuary head, 100 per cent FDI under the automatic route may be considered permissible. However, ambiguity arises since regulatory provisions require a regulated educational institution to be set up only as a trust or a society, wherein no FDI is permitted. This adversely impacts the fund-raising capability of a trust or a society from foreign sources. The only options left are contributions or donations that are subject to stringent conditions imposed by the Foreign Contribution Regulation Act, 1976.
The much-awaited Foreign Educational Institutions (Regulation of Entry and Operation) Bill, 2010, is a welcome legislation and an example of the forward-looking mindset of the Ministry of Human Resources and Development. The Bill is aimed at regulating the entry and operation of foreign educational institutions that are imparting or intend to impart higher education in India. The Bill, if passed, would enable foreign universities to set up campuses in India and offer degrees.
Besides, four more Bills aimed at reforming the education sector are on the cards. These are (a) The Prohibition of Unfair Practices in Technical Educational Institutions, Medical Educational Institutions and Universities Bill, 2010, (b) The National Accreditation Regulatory Authority for Higher Educational Institutions Bill, 2010, (c) The Education Tribunals Bill, 2010 and (d) National Commission for Higher Education and Research Bill, 2010. These legislations have the potential to change the education sector’s entire legal and regulatory framework.
Though regulatory challenges are one side of the coin, educational institutions have to comply with the income-tax legislation as well.
Since a formal educational institution may be established only as a trust, a society or a Section-25 company for “not-for-profit” purposes, Section 10(23C) of the income-tax law provides tax exemption subject to the fulfilment of stipulated conditions like application of income, modes of investment of surplus and so on. For claiming the exemption, the institution has to get itself registered with the income-tax authorities. Challenges are faced at the time of obtaining the registration since it needs to be established before the tax authorities that the institution exists solely for educational purposes. The institution is also required to obtain an approval from the income-tax authorities to enable donors to claim tax deduction under the commonly referred Section 80G.
Given the amount of funds and the number of “quality” institutions the education sector needs to bridge the demand-supply gap and the inability of the government to cater to such demand, the government should liberalise the regulatory regime governing the education sector and adopt a pragmatic approach permitting a “for-profit” model for educational institutions. It may also consider promoting public private partnership (PPP) in the sector similar to the one implemented successfully in infrastructure projects.
The author is Partner Tax and Regulatory, KPMG, India
