The Indian private education sector offers considerable opportunities for the private sector.
• Policy initiatives to encourage private participation in PPP models & education services;
The Indian private education sector offers considerable opportunities for the private sector. In the context of higher education, the Ministry of Human Resource and Development has targeted an increase in the gross enrollment ratio from the current 12% to 30% by the year 2020. If this is to be achieved, India would need over 300 new Universities and 20,000 new Colleges to be set up. Significant expansion in the number of K-12 institutions is also required. These supply gaps cannot be achieved through public funding alone and there is an acute need for the private enterprise to significantly increase its participation in the sector.
Education in India comprises of the regulated and unregulated segments. For example, segments such as vocational training, test preparation centers, ICT services, etc, are subject to little or no regulation. On the other hand, K-12 education and institutions that offer degrees or diplomas comprise the regulated segment. Under Indian laws, the regulated segment requires the institution to function under a not-for-profit format and has been historically subject to archaic laws and multiple regulations. Subject to CSR initiatives, the not-for-profit mandate and the regulatory framework may have dissuaded private capital from entering the regulated segment. While it may be too much to expect the Government to make the structural change required to move towards a for-profit-model, the Government through policy could encourage private sector participation through public-private partnership models and education services.
The private sector can be encouraged to provide much needed real estate and infrastructure to K-12 schools and higher education institutions. Both K-12 legislation such as those of CBSE, ICSE and State Boards and higher education legislation such as certain Private University laws permit the institution to lease land and buildings subject to minimum lease tenures. A pain point in this context is India’s Foreign Direct Investment (“FDI”) regulations, as applicable to real estate. While foreign investment up-to 100% is permitted in real estate, stringent investment and development conditions have been prescribed. One such development condition is the requirement to develop a minimum of 50,000 square meters per project, which is in particular difficult to comply with for school projects. The Budget should take steps to dilute the FDI regulations for the education sector on par with those of other infrastructure segments such as hotels and hospitals in which FDI is permitted without restrictions. A lease model may help the education institution achieve scale faster and will result in a win-win situation for both the Government and the service provider.
Under the domestic tax law, education is a ‘charitable activity’, which entitles not-for-profit entities to claim income-tax exemptions on their income. However, no similar incentives are provided to entities engaged in the development of infrastructure for education purposes. The dearth of high quality infrastructure in both private / State institutions justifies the need for tax holidays for entities that invest in the creation of education related infrastructure. Such tax breaks could be structured on the same lines as the deductions contained in tax law for the development of other infrastructure segments such as industrial parks, hospitals, etc. Such a policy will positively impact the creation of additional capacities and among others would help the Government achieve its social objectives around implementation of the Right to Education Act, 2009 and its targeted gross enrolment ratios.
The fees charged by recognized education institutions to students are not subject to service tax. However, most services consumed by such institutions are subjected to service tax and as a result the tax burden is passed on to students. The Finance Minister could consider exempting services rendered by entities to recognized educational institutions from the levy of service tax. Under the current service tax code, taxable service categories such as immovable property rentals and business support services provided to recognized education institutions are not subject to service tax and it would be helpful if the exemptions can be applied across a larger list of taxable service categories. If such an exemption is provided, this would reduce the cost of imparting education by a few percentage points and would make it easier to comply with the RTE Act and sixth pay commission norms.
While staying on the subject of service tax, the definition of commercial coaching and training centers was widened in the last budget. This year it is rumored that the service tax net would be widened to include additional education services. Human resource development is one of India’s most critical challenges given our demographic profile and the Minister should weigh the potential revenue collection with access and equity to achieve inclusive growth.
As is common to other sectors as well, tax and policy certainty is critical while making investment decisions; else the risk weightage for the sector increases. The Ministry of Human Resource Development has proposed a large number of Bills including the Foreign Education Providers Bill and the Unfair Practices Bill. The passage of such Bills would help the process of reform and would add to policy certainty across the higher education sector. We are hopeful that the Finance Minister would in his Budget provide a road map towards enactment of pending Bills; which otherwise may share the fate of several other legislation which either does not get enacted or are enacted after significant delays.
By: Madhav Chanchani
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