Investing in India’s Education Market: FDI Policy, Regulation, and Taxation
India encourages foreign investment in the education sector and tax relief is provided as education is considered a fundamental right and service. However, this means that public and private educational institutions must follow a ‘not-for-profit’ structure. This has resulted in innovative investment structures.
India’s strong fundamentals and long-term structural growth drivers like a young working population, increased urbanization, rapidly growing middle class, and rising disposable incomes make it an attractive investment destination for long-term investors.
Given the large population base and young demographics, it is no surprise that India has among the largest number of education seekers anywhere in the world. With a diversified mix of public and private ownership, there are numerous institutions across the country – from the pre-primary level all the way to the university level – to cater to the needs of hundreds of millions of students that constitute over one-third of the country’s population.
The Indian government has undertaken various measures to improve the quality of education in the country and make secondary and higher education accessible to a larger proportion of its population.
FDI policy and investment strategy
The foreign direct investment (FDI) Policy allows up to 100 percent foreign investment in the education sector under the automatic route (that is, without needing prior government approval). Further, FDI in companies engaged in
construction-development projects (including inter alia educational institutions) is permitted up to 100 percent under the automatic route, subject to compliance with certain conditionalities.
The ‘not-for-profit’ compulsion
Despite the liberal FDI norms, investment in the education sector does grapple with regulatory hurdles that restrict greater expansion. This is because the government has mandated the not-for-profit entity structure as education is treated as a service in India and not a business. No FDI is allowed in Section 8 companies – trusts and societies or school fee management, etc. The National Education Policy 2020 also aims to stop commercialization of higher education and that all education institutions are audited to ascertain their not-for-profit entity status.
This has led to foreign players employing multi-tiered structures to invest in India. For example, BusinessWorld observes a commonly adopted structure – a three pronged model where (a) the educational institution is run by a not-for-profit entity, such as a public trust; (b) the infrastructure of the educational institution is housed within a separate ‘for profit company’ that acquires, constructs, and develops the school building and associated infrastructure and leases it to the education institution on a long-term basis in exchange for lease rentals; and (c) certain management and supporting services like the provision of specialized content, teacher training, marketing and admission, maintenance and support, transportation, catering, housekeeping, or security services etc. are outsourced by the educational institution to another ‘for profit’ entity, on an arm’s length basis.
It is precisely because of how complicated these multi-layered investment structures can be, that foreign and domestic stakeholders seek business opportunities outside the traditional formal education system. Attractive education segments include pre-schools, private coaching, and tutoring, teacher training, the development and provision of multimedia content, educational software development, skill enhancement, IT training, and e-learning.
Laws applicable to educational institutions
Societies Registration Act, 1860
Educational institutions are generally registered as societies under the Societies Registration Act, 1860. Registration can be done both under the Central Act as well as State enactments and in cases where the State Act exists, registration is done by State Governments in whose territories the society is located.
The societies to be registered must have been established for literary, scientific, or charitable purposes. Section 20 stipulates the following: “Societies established for the promotion of science, literature or the fine arts, for instruction, the diffusion of useful knowledge”.
Public Trusts Act
Educational institutions may also be established as Public Charitable Trusts. The Charitable Endowment Act, of 1890 defines charitable purpose as a purpose for “relief of the poor, education, medical relief and advancement of any object of general public utility” but excludes a purpose exclusively for religious teachings. The Central legislation governing trusts is the Indian Trust Act, 1882. The trust deed must be registered with the registration department of the respective State Government.
Companies Act, 2013
An educational institution may also be incorporated as a company under section 25 of the Companies Act, 1956. Such institutions may be given a license by the Central Government when it is incorporated as a company with limited liability.
Such license may be granted if the Central Government is satisfied that the company is to be formed for promoting commerce, art, science, religion, charity, or any other useful object and it intends to apply its profit if any, or other income in promoting its objects and to prohibit the payment of any dividend to its members.
The income of an educational institution is subject to income tax, except where the provisions (Chapter III of the Income Tax Act, 1961) for grant of exemption are applicable. The benefits given are, however, subject to certain restrictions, to ensure that the institutions spend their funds on charitable causes only.
Section 10(23C) provides an exemption to educational institutions under certain circumstances, not necessarily being trusts or societies, provided that such institution exists solely for the purpose of education and not for the purpose of profit. Institutions having receipts more than the prescribed limits must specifically apply for such exemption.
Section 2(15) of the Income Tax Act, 1961 defines charitable purpose to include ‘education’. Approved charitable institutions whose income is not liable to be taxable under the provisions of sections 11 to 12 or 10(23C) are also eligible for further benefits in the shape of deduction available to donors to such societies.
The donee institutions must apply for this benefit to the Commissioner of Income Tax. The donors upon making donations to such institutions can claim deductions from their income at the prescribed rates, from their taxable incomes. The approval granted by the Commissioner of Income Tax shall continue to be valid in perpetuity.
A special set of provisions governing the taxability of income from property held under trust for a charitable purpose is contained in Sections 11 to 13 of the Income Tax Act, 1961.
Goods and services taxation (GST)
Education is fundamental to the nation-building process as per the government. The right to education is a fundamental right of every child in India.
GST Law recognizes this notion and provides an exemption to educational institutions providing education up to higher secondary school or equivalent from the levy of GST. Auxiliary services received by such educational institutions for the purpose of education up to the higher secondary level are also exempt from GST.
Other services related to education, not covered by the exemptions, will be taxed at a standard rate of 18 percent with full admissibility of input tax credit (ITC) for such taxable services in cases where the output service is not exempt.
In a nutshell, every attempt is made to ensure that core educational services are fully exempt from GST.
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