Budget 2025 Expectations: Education Sector

Sahil Gupta, Partner, Deloitte India | Saloni Roy, Partner, Deloitte India

Current environment

The regulatory landscape for the education sector continues to evolve. Through regulatory changes, regulators are facilitating opportunities for stakeholders by taking measures to internationalise the education ecosystem, bring transparency and industry relevance and improve access to education for India’s youth.

Some areas where regulatory stakeholder consultations have resulted in promulgation of regulations are:

• UGC Guidelines to facilitate the setting up foreign university campuses anywhere in India, which will further add to the impetus of internationalisation.
• An Institutional Development Plan (IDP) for higher education institutions, which provides a strategic roadmap for their functional and structural growth.
• Mandatory disclosures on institutions' websites provide much-needed transparency and allow students and parents to make well-informed decisions about admissions.
• Introduction of PM Vidyalaxmi scheme to provide financial support to meritorious students, thereby improving access to education and targeting to increase the Gross Enrolment Ratio (GER).

While NEP 2020 provides a broad framework and policy direction, its implementation on the ground and promptly is critical to the success of the sector. The National Research Foundation (NRF) operationalisation is one such initiative that would help enhance the research capabilities and the infrastructure required for undertaking research in the country. This is one of the most significant contributors to developing the nation's innovation landscape.

Expectations

Top three asks

Enable foreign investments and foreign currency loans
While 100 percent Foreign Direct Investment (FDI) is permitted in the sector under the automatic route, FDI is restricted for entities categorised as "trust" or "society" due to sectoral requirements. Similarly, raising foreign currency loans (at cheaper rates) is not enabled due to the “trust” or “society” nature of the borrowing entity.

• Rationale
  Educational institutions need to upgrade their infrastructure and adopt new and better technology solutions for programme delivery to improve student learning and engagement and remain relevant. Additionally, they need to continuously reskill their faculty and hire new instructors with skills relevant to the current educational landscape. These initiatives require Institutions to raise funds. Domestic banks do not consider lending to institutions favourably due to a lack of transparency in their entity structure of trust/society and related governance.

• Measurable outcome
  An amendment to the exchange control regulations should be made to allow foreign investments and the availing of foreign currency loans in trusts and societies running educational institutions. Union Budget 2021 recommended that FDI and External Commercial Borrowing (ECB) for the educational sector will be enabled, but action is yet to be taken on the same.

Expediting clearances for receipt of donations and grants from foreign sources

• Rationale
  The receipt of grants and donations from foreign sources is an important source of income for educational institutions, including those conducting joint research programmes with overseas institutions. However, such receipt requires prior permission or registration with the Ministry of Home Affairs, which is extremely time-consuming.

• Measurable outcome
  Timelines for obtaining clearances from the Ministry of Home Affairs must be clearly outlined, and the process should be streamlined.

Introduce flexibility of receiving student fees in Indian Rupees by Foreign Education Institutions set up in GIFT City

• Rationale
  The IFSCA (Setting up and Operation of International Branch Campuses and Offshore Education Centres) Regulations, 2022 require the educational institution to undertake all transactions in foreign currency only, except for defraying administrative expenses.
  Students would also need to pay fees in foreign currency, and the conversion charges would add to the financial burden on students and parents.

• Measurable outcome
  Students should be exempt from paying their fees (academic, hostel and other similar payments) in INR.
  A similar exemption had been issued by RBI allowing units in IFSCA to conduct business in INR vide FEMA Notification No. 397/RB-2020, under the Foreign Exchange Management (International Financial Services Centre) (Amendment) Regulations, 2020.
  
  This would ease the financial burden on the students/parents on account of foreign exchange conversion charges.

Other policy recommendations and expected impact/outcome

• A fast-track process for the application and grant of patents for educational institutions should be introduced. Grant of patents is a sign of innovation. With reduced timelines for the application process and its grant, it will lead to higher research and development in the country.

• Minimum area requirements for the set up of higher educational institutions should be done away with, and a lease-based model (as opposed to ownership of land) should be introduced. This could help reduce the capital requirements for new institutions, considering the constraints posed by the lack of funds in the higher education ecosystem coupled with prioritising the fund’s allocation towards improving infrastructure, hiring quality faculty, enhancing the student experience and launching new-age industry-relevant programmes.

• Removal of the validity period of the certificate of registration by GIFT City to Foreign Education Institutions. Educational institutions are set up on a strategic and long-term basis. The process for renewal every 5 years causes administrative inconvenience.

Direct Tax

Current environment

On the direct tax front, the education/not-for-profit space has seen increased vigilance with restrictive provisions introduced under various Acts, such as the Income Tax Act, 1961 (IT Act). For example, provisions introduced for specified violations and enabling provisions to tax income do not comply with prescribed exemption provisions.

This has led to an increased compliance burden on taxpayers. The additional compliance requirements enable simpler and more comprehensive processes while ensuring adequate monitoring/oversight.

Expectations

Top asks

Clarification in relation to the meaning of the term “education” for purposes of Sections 11 and 10(23C)

Rationale
In October 2022, the Hon’ble Supreme Court (SC), in the case of New Noble Education Society [TS-809-SC-2022], interpreted the term “education” in a restrictive manner by ruling that the IT Act provides for “imparting formal, scholastic learning” as a meaning to the word “education” under the definition of “Charitable Purpose” under Section 2(15).

In the progressive world, educational institutions are expected to educate, teach and train people in various skills to help them compete with similar experts worldwide and increase their employability. This move will ensure the availability of a skilled workforce for futuristic technologies, high-end manufacturing and research and help build the nation’s capacity.

Measurable outcome
In light of the current dynamic environment and changes in social and economic conditions, the scope of the word “education” should be broadened to include systematic dissemination of knowledge (through regular classes, attendance requirements and enforcement of discipline) and training in specialised subjects.

Clarification in relation to the merger of charitable trusts/institutions vide Section 12AC

Rationale
Budget 2024 introduced Section 12AC pertaining to the merger of trusts/institutions having the same/similar objects and fulfilling other prescribed conditions. The said section exempts the application of prescribed provisions on tax on accreted income of trusts (i.e., Chapter XII-EB) in case the merger satisfies prescribed conditions. However, certain aspects are pending to be clarified/prescribed rules pending to be issued.

Measurable outcome

• Clarifications in relation to the following aspects to be introduced:
  Meaning of “same/similar objects” to be clarified to interpret in a broader sense;
• Clarification that merger of trusts/institutions registered under two regimes [i.e., one trust registered u/s 10(23C) and one registered u/s 12AB] shall be possible;
• In case the two trusts qualify as “related parties” in terms of Section 13(3), implications on consideration, if any, on merger; valuation of assets/liabilities, etc;
• Clarification on interplay with Section 115TD of the IT Act;
• Impact on 5-year limits in case of accumulation of income/application from the loan, borrowings/application from corpus, etc;
• Clarification in relation to subsuming any pending litigation/assessments of the two entities, etc.
  

Amendments in Section 13(3)

Rationale
Provisions of Section 13(1)(c) r.w. Sections 13(2) and 13(3) seek to tax any income of the charitable trust/institution that is applied for the benefit of “specified persons”. Essentially, any transactions not undertaken on an arms’ length/reasonable basis, such as excessive consideration paid to or inadequate consideration received from a “specified person,” is considered a benefit to such specified person.

Section 13(3) includes within its ambit the author/founder/trustee/substantial contributor/any relative or concern of the said persons as “specified persons”.

Amendment in relation to the substantial contribution

• A person who has contributed an amount exceeding INR50,000 qualifies as a “specified person” in terms of Section 13(3). It is pertinent to note that the limit of INR50,000 was last amended by the Finance Act 1994 (whereby the erstwhile limit of INR25,000 was revised). Considering the current economic growth and rupee value, the limit of INR50,000 is commonly met even in the case of one-off donations. Given that the limit has remained unchanged for the past ~ 20 years, it is advisable to revise it to align with the current economic scenario.
• Apart from the above, the clause is silent on whether the monetary limit (currently INR50,000) is to be tested once or yearly.

Amendment in relation to substantial interest in a concern

• Any concern in which the prescribed persons have a “substantial interest” shall also be considered as a “specified person” of the Trust in terms of Section 13(3) of the IT Act.
• “Substantial interest” is defined as beneficial ownership of shares, carrying voting power of 26 percent or more in the case of a company, and entitlement to 26 percent or more of profits in case of any other concern.
• The definition of “specified persons” is very widely worded and already includes relatives of the prescribed persons. Further, Trusts face a practical challenge in tracing such concerns/obtaining the required information from each of the prescribed persons. Accordingly, it shall be considered to increase the limit of 26 percent to cover only those concerns whereby prescribed persons have a majority/controlling stake.

Amendment in relation to substantial contribution: Considering the current economic scenario, the current limit of INR50,000 should be increased to a higher amount, say INR10 lakh. Further, it should be clarified that the monetary limit is to be tested on a yearly basis (as against a one-time basis).

Amendment in relation to substantial interest in a concern: Considering the widely worded definition of “substantial interest” and the practical challenge in tracing such concerns, the limit of 26 percent should be revised to a higher limit, say 51 percent.

Apart from the above, it shall be clarified that any transactions between two charitable institutions having similar objects shall not fall within the ambit of the above Section 13(1)(c) r.w. 13(3), since the ultimate objective is charitable and the ultimate benefit shall be for the general public as against any “specified person”.

Clarification in relation to tax implications/incentives to foreign universities

Rationale
At present, regulations have been introduced in relation to the manner/procedure to be followed by foreign universities/educational institutions for setting up International Branch Campuses (IBC)/Offshore Educational Centre (OEC) (including relevant conditions to be satisfied).

Measurable outcome

• Certain key clarifications ought to be provided from a tax perspective, as mentioned below:
• Most foreign universities get perpetual tax exemption in their home countries. Hence, a similar perpetual tax exemption ought to be provided to incentivise the top universities to set up under IFSCA. A perpetual tax holiday would be more attractive and at par with the tax exemptions in the home country. Section 80LA, which currently provides a tax holiday for 10 years, may be amended to this effect to provide the perpetual exemption, subject to the satisfaction of condition as may be laid down.
• Foreign players may find it helpful if clarifications were provided that prescribed transactions/interactions by the IBC/OEC in India shall not result in a Significant Economic Presence (SEP) and consequent business connection.

Other recommendations and expected impact/outcome

• With respect to charitable trusts registered under the IT Act, the provisions of Section 11(1)(a) operate to exempt the income applied to charitable purposes in India.
  
  The provisions of Section 11(1)(c) embargo the exemption with respect to any income applied outside India unless that income is applied for international welfare in which India is interested and requisite approval is obtained from the Board.
  
  In some situations, certain income may be remitted outside India for charitable objects/purposes in India. For instance, availing services from non-residents in relation to charitable operations conducted in India.
  
  In this regard, it may be clarified that any income remitted outside India for application to charitable purposes within India shall qualify for the exemption u/s 11(1)(a) above and ought not to fall within the ambit of Section 11(1)(c).

• Generally, per the conditions laid down in the registration order/approval order u/s 12AB and 80G (i.e., Form 10AC), the charitable institution is required to obtain prior approval or intimation of the Commissioner of Income Tax (CIT) in case of change in its objects/rules and regulations or in case of transfer of any asset by the charitable institution.
  
  Currently, the procedure to obtain prior approval/intimation of the CIT is an offline process, which may be time-consuming and involve subjectivity. In this regard, an online procedure may be introduced to seek the aforesaid prior approval/prior intimation for change in objects/rules and regulations or in case of asset transfer.
  
  
• Charitable institutions having obtained prescribed approval u/s 80G are required to file a statement of donation in Form 10BD on or before 31 May of the next financial year. Correspondingly, they are required to issue donation certificates in Form 10BE (auto-generated post-filing of Form 10BD) on or before 31 May of the next financial year (i.e., same due date as Form 10BD). In this regard, considering that the Form 10BE certificates are auto-generated only post-filing of Form 10BD, it may be considered to amend the due date for issuance of Form 10BE to 15 June of the next financial year (similar to 15 days time limit in case of Form 16/16A certificates generated post-filing of TDS returns).

Indirect Tax

Current environment

Taxing the education sector remains challenging, as achieving a balanced approach is complicated by uncertainties regarding the distinction between core and ancillary education. Numerous questions continue to arise about the definition of education, what constitutes an educational institution, and the place of supply for education-related services, among other concerns.

Some areas where stakeholder consultations have resulted in clarity in regulations are:

• Affiliation services provided by universities to colleges have been declared as taxable @ 18 percent

• Affiliation services provided to schools by Central or State education boards or councils, or other similar bodies, regardless of their names, have been declared as taxable @ 18 percent

• Accreditation services provided by Central or State boards (including the National Board of Examination) to an institution or to a professional to authorise them to provide their respective services have been declared as taxable @ 18 percent

Expectations

Issue clarification on the place of supply applicable for exam administration services

Rationale
With the fast-paced commercialisation of the education sector, several Indian entities collaborate with foreign entities to provide private coaching or conduct various exams in India. While the services are availed by students in India (in the form of test centres/coaching centres) however, the contractual arrangement flows between the Indian entity and the foreign entity. Generally, in such scenarios, the foreign entity appoints the Indian entity to conduct exams in India, for which the latter receives consideration from the foreign entity. However, the exams are conducted at test centres based in India, leading to doubt about the place of supply for such services.

Measurable outcome
A clarification should be issued to specify the place of supply for such scenarios where exams are being conducted in India, but the contractual agreement is executed between the Indian entity and the foreign entity, wherein the Indian entity is the supplier and the foreign entity is the recipient of such services.

Issue clarification on the scope of “services relating to admission to, or conduct of examination” so as to determine the taxability of services ancillary to the education sector

Rationale
Various services are ancillary to the education sector, such as organising a venue for conducting tests, appointing an invigilator, grading and issuing exam results. However, the taxability of such ancillary services remains a question as there is no clear guideline as to what services are covered in the exemption notification entry “services relating to admission to or conduct of examination.”

Measurable outcome
A clarification should be issued to specify what services are covered under “services relating to admission to, or conduct of examination”. This would help businesses to take appropriate positions from a tax perspective.

Contributed by: Pankaj Bagri, Deloitte India