The National Education Policy 2020 envisages growth of nearly 100 per cent, from 26-50 per cent, in Gross Enrolment Ratio (GER) in higher education. India has around 40,000 brick-and-mortar institutions imparting undergraduate education. To double GER, even a basic analysis would suggest establishing 40,000 more undergraduate institutions. One may argue that we could encourage existing institutions to expand, but would that extend our reach to every remote place across the country?

Building such infrastructure is fraught with challenges — land, faculty and finance, to name a few. Therefore, India must use digital technologies to completely revolutionise traditional education content and delivery process. Academic institutions and Edtech companies should be encouraged to collaborate to produce and deliver high quality digital learning material.

Appropriate tax incentives and timely policy changes are key to promoting digital learning, synchronous and asynchronous, and helping educational institutions attract funds to commit themselves to digital education, which is not only the future, but also the right, if not the only, vehicle to achieve the desired GER target and beyond.

The Covid experience has exposed the vulnerability of most private educational institutions in managing cash flow requirements and their inability to fund operating expenditure. Some institutions are finding it difficult to pay salaries, and many have retrenched staff. Most of them do not have the money to invest in technology required to provide quality online education.

On the face of it, this cash-flow problem may seem to be a temporary pandemic year issue, but surprisingly it’s not. This crunch rears its ugly head in many institutions during normal times as well. In fact, leveraged institutions are more vulnerable.

In India, the authority to grant degree/diploma is given to those institutions which operate as ‘not for profit’. These institutions have to register under Section 12A or 10(23C) of the Income Tax Act, 1961 to enjoy “tax exemption” status. However, to obtain tax exemption, the institutes need to spend 85 per cent of the revenue earned. Only 15 per cent can be retained to manage future cash flows or crisis.

The pandemic has shown that the corpus built over time with 15 per cent surplus is not sufficient to tide over the crisis. Often institutions borrow money to meet their day-to-day expenses, adding further pressure to the existing cash flow problems.

Also, many students take loans to pay their tuition and hostel fee. Banks are at times too bureaucratic and reject loans on flimsy grounds like inadequate address proof, some old defaults by parents, or low CIBAL score of parents/student. Many students are not able to pay their tuition fee on time. Some are forced to leave the course halfway, which adversely impact their career and simultaneously worsen the institute’s cash-flow problem.

Tax proposals

Budget 2021 is the first one after the release of NEP 2020, and the government needs to showcase its intent. Here are some suggestions in the realm of taxation that may be considered:

The 85 per cent expenditure limit to get tax exemption may be reduced to 75 per cent. The additional 10 per cent can be invested in a fund specially created by the government for educational institutions. This fund should be available to the institutes ‘on tap’ during a crisis ( which should be well defined) or for infrastructure development during big expansion (for instance, a standalone institute becoming a university).

The government, on the other hand, could use this amount for funding education initiatives.

Further, institutes having good NAAC or NBA score must be allowed to retain an additional 10 per cent, over and above the aforesaid 25 per cent, in a fund earmarked for providing short-term loan to students having difficulty in obtaining financial assistance. Let the student pay EMI. The interest could be charged at the opportunity cost of the fund that has been released (say, the FD interest).

Such interest received should not be considered as income for surplus calculation of the institution but be reinvested to the earmarked fund. Such provisioning norms will go a long way in providing low cost fund to those students who cannot provide collaterals to obtain loans. It will also help the institution to grow.

Indirect tax exemption on auxiliary services (rent, food contract, housekeeping, security, transport services) for higher education should be reinstated. On an average, these categories of expenditure constitutes 25-30 per cent of the cost. GST of 18 per cent (on an average) enhances cost by 6-7 per cent, which is pretty steep. If institutes are exempted, they can pass these benefits to students by reducing fees and making higher education more accessible to all.

Entrepreneurial initiative

Recent studies have shown that a degree is less valuable than what it used to be 10 years ago. The unemployment scenario is grim and the Covid experience suggests that the composition of workforce will change big time in the coming times. We will move steadily, but surely towards a gig economy. Thus promoting entrepreneurial initiative is the call of the hour.

Currently, the expenditure of an educational institute towards incubation centres or entrepreneurship cell is allowed as a deduction for computing surplus, but investment made in an ‘idea’ as “seed money” is not allowed as deduction. Again, if the idea is successful, the income from such investment is required to be taken as income for surplus calculation, but loss if any is not deductible.

It is suggested that investment made on ‘ idea’ by an institute be allowed as deduction for computation of surplus. Income and loss that will happen in future be taken into account. To encourage digitalisation of education, Budget 2021 may introduce investment option also to Edtech companies (maybe with lock-in period of three years) as a tax saving option. These funds may again be available to the government for implementation of NEP 2020 and help reduce tax liability to such outfit.

The writers are Directors, Great Lakes Institute of Management, Gurgaon