Educational Establishment in India Financial & Tax Considerations

Educational Establishment in IndiaFinancial & Tax Considerations

© Deloitte & Touche LLP and affiliated entities.

Contents

• Education Sector in India – overview of regulatory framework

• Brief overview of certain key Indian financial and tax aspects pertinent to Foreign Educational Institutions: Foreign Direct Investment (FDI) Regulations Broad Indian Tax Framework Other Tax Considerations Foreign Educational Institutions(Regulation of Entry and Operations) Bill, 2010

• Setting up an Educational Institution in India – Alternative Entities

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Education Sector in India


Regulatory framework

Kindergarten - 12th (K-12)• The CBSE/ ICSE and state board regulations broadly stipulate running of a K12 institution only as a

trust or society.

• Income from the trust, the' reasonable surplus’ (not defined) can be used for the development of the same institution and cannot be distributed as dividends.

• There is no umbrella regulation of K-12 schools,

• Though some states provide ‘for profit schools’, at least on paper these are still structured as non profit trusts in order to get recognition from certain bodies. Schools seeking affiliations with international boards such as IGCSE (International General Certificate of Secondary Education), may opt either for-profit company or a not-for profit trust, depending on state laws.

Higher Education• Higher education has several regulatory bodies, including AICTE “All India Council for Technical

Education” and UGC ”University Grants Commission “.

• As education is a joint responsibility of the Central and State governments, some states have passed separate legislations on private higher education.

Foreign institutions (Proposed)• Entry of foreign educational institutions in India would be governed by the Foreign Educational

Institutions Bill which proposes to grant university status to foreign institutes.

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Foreign Direct Investment in Education Sector


Foreign Direct Investment (FDI) Regulations

• Foreign investment in India is governed by the Foreign Direct Investment (FDI) policy announced by the Government of India (GOI) and provisions of the Foreign Exchange Management Act, 1999 (FEMA)

• Under the FDI Scheme, investment can be made by a foreign investor in shares of an Indian Company, under two routes, namely:– Approval Route– Automatic Route

• Under the automatic route, no approval of the GOI or the Reserve Bank of India is required

• 100% investment is permitted under automatic route in a company incorporated in India in the education sector

Source: Press Note 7 (2008) and Press Note 2 (2005)

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FDI in society/ trust may not be permissible under the automatic route


Payment of Remuneration to Expatriate Faculty

• Payments for current account transaction are permissible on an automatic basis, unless the same are specifically prohibited

• Payment for consultancy services procured from outside India up to US$ 1 million per project is permitted on an automatic basis.

• Salary paid to a foreign citizen on deputation to a subsidiary /joint venture in India should be permissible to receive the whole salary for the services rendered to the subsidiary/joint venture in India, outside India provided that income-tax is paid on the entire salary which accrues in India

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Remuneration to expatriate faculty should be permissible


Income-tax Act, 1961


Broad Indian Tax Framework

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Tax Rates in India

Long term capital gains

exempt(transfer on Indian

stock exchange)

Short term capital gains

@ 16.61% or

15.84%*(transfer on Indian

stock exchange)

Long term capital

gains @ 22.15% or 21.12%*;

Short term capital

gains @ 33.22% or 42.23%*

Tax on Sale of Shares

No PE^ in India – No corporate

tax in India

Domestic company

@ 33.22%

Foreign company

@ 42.23%

Corporate Tax Rates

DividendExempt

(DDT^^ @ 16.61%

leviable on distributor)

Interest@

21.12%*(or lower

rate as per tax treaty)

Royalty@

10.56%*(or lower

rate as per tax treaty)

Tax on Repatriation

If investment is held for more than 1 year, then long term; else short term

^ PE – permanent establishment ^^ DDT – Dividend Distribution Tax

* Rates for Foreign company


Other Tax Considerations


Other Considerations

• Canada – India Tax Treaty

‒ Potential impact on taxation of services provided

‒ Taxation of services provided by foreign individuals

• The DTC is proposed to come into effect from 1 April 2011 in place of the current ITA

‒ Impact on taxation of not for profit educational institutions

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Foreign Educational Institutions (Regulation of Entry and Operations) Bill, 2010


The Foreign Educational Institutions (Regulation of Entry and Operations) Bill, 2010 The Human Resource Development Minister has released the Bill on 19th April 2010 for regulating the entry and operation of foreign educational institutions in India. The Bill would become an Act if it is approved by the both houses of the Indian Parliament.

Certain key highlights of the Bill are as follows:

• To set up a campus in India, a Foreign Educational Institutions (FEI) should be recognized and notified by the Central Government as a foreign education service provider.

• The FEI would need to submit an application to the Registrar, along with the specified documents to the effect that: The FEI has been established and has been offering educational services for at least

20 years under the laws of Canada.Status of accreditation from the accrediting agency in Canada.The FEI has adequate financial and other resources for conducting the course in India.An undertaking that the FEI would maintain a corpus of not less than INR 500 Million

($12 million).

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The Foreign Educational Institutions (Regulation of Entry and Operations) Bill, 2010

• The educational entity incorporated as an Indian Company (‘IC’) would need to offer and impart education programs in conformity with the standards laid down by the statutory authority enacted under the Central Act.

• Up to 75% of the income received from the corpus fund can be used by the IC for the purpose of development of the educational entity in India. The balance unutilized income shall be deposited in the corpus fund.

• Surplus in revenue generated in India (after meeting expenses in connection with operations in India) would need to be invested only for growth and development of the educational entity established in India.

• FEI which are not notified by the Central Government which impart education leading to award of a certificate, not being a degree or diploma shall furnish a report of its activities in a format as may be specified

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Setting up an Educational Institution- Alternative Entities

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Regulated by Society Registration Act,1860

Minimum number of members required = 7

Main instrument of any society is the memorandum of association and rules and regulations

Profits cannot be taken out of the institution and have to be reinvested

Regulated by Indian Trust Act,1882/ State Trust Act

Trust may be created by every person competent to contract

Main instrument of any public charitable trust is the trust deed.

Application for registration should be made to the official having jurisdiction over the region in which the trust is sought to be registered

Reserve Bank of India approval would have to be obtained to allow non residents/ foreign citizens as trustees

Governed by Indian Companies Act,1956

Main instrument is a Memorandum and Articles of Association

The profits, if any, or other income must be applied for promoting the objects of the company

No dividend pay-out to its members

Educational Institution in India – Possible Entity StructuresEducational Institution in India – Possible Entity Structures

Not for Profit Company/ Section 25 Company

Alternatives available to set up the Foreign educational institution

TrustSociety

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Company vis-à-vis trust/ society

Key Attributes Company Trust/ Society

100 % Foreign Investment Possible Not Possible

Reporting Requirements Reports to the Registrar of Companies

Trustee has to submit budget to Charity Commissioner (‘CC’)

Allowability of non residents/ citizens on the Board/ acting as trustees

No specific approval from exchange control required to have non residents/ foreign citizens on the Board

Non residents/ foreign citizens acting as trustees would require exchange control approval.

Administration No specific powers to Registrar of Companies with regard to administration.

CC is empowered to issue directions for proper administration of the affairs of the trust , the working of the trust is subject to inspection and supervision of CC

Foreign Donations and Receipts

Registration with the FCRA and yearly intimation of foreign donations and receipts

Registration with the FCRA and yearly intimation of foreign donations and receipts

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Contacts

Arvind [email protected]

Rajiv [email protected]


Documents

Educational Establishment in India Financial & Tax Considerations