Educational Establishment in India Financial & Tax Considerations Contents • Education Sector in India – overview of regulatory framework • Brief overview of certain key Indian financial and tax aspects pertinent to Foreign Educational Institutions: • 1 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 © Deloitte & Touche LLP and affiliated entities. Education Sector in India © Deloitte & Touche LLP and affiliated entities. 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. 3 © Deloitte & Touche LLP and affiliated entities. Foreign Direct Investment in Education Sector © Deloitte & Touche LLP and affiliated entities. 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 FDI in society/ trust may not be permissible under the automatic route Source: Press Note 7 (2008) and Press Note 2 (2005) 5 © Deloitte & Touche LLP and affiliated entities. 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 Remuneration to expatriate faculty should be permissible 6 © Deloitte & Touche LLP and affiliated entities. Income-tax Act, 1961 © Deloitte & Touche LLP and affiliated entities. Broad Indian Tax Framework Tax Rates in India Corporate Tax Rates No PE^ in India – No corporate tax in India Domestic company @ 33.22% Foreign company @ 42.23% ^ PE – permanent establishment ^^ DDT – Dividend Distribution Tax 8 Tax on Sale of Shares 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%* If investment is held for more than 1 year, then long term; else short term Tax on Repatriation Dividend Exempt (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) * Rates for Foreign company © Deloitte & Touche LLP and affiliated entities. Other Tax Considerations © Deloitte & Touche LLP and affiliated entities. 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 10 © Deloitte & Touche LLP and affiliated entities. Foreign Educational Institutions (Regulation of Entry and Operations) Bill, 2010 © Deloitte & Touche LLP and affiliated entities. 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). 12 © Deloitte & Touche LLP and affiliated entities. 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 13 © Deloitte & Touche LLP and affiliated entities. Setting up an Educational Institution - Alternative Entities © Deloitte & Touche LLP and affiliated entities. 14 Educational Institution in India – Possible Entity Structures Alternatives available to set up the Foreign educational institution Society 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 15 Not for Profit Company/ Section 25 Company Trust Regulated by Indian Trust Act,1882/ State Trust Act Companies Act,1956 Trust may be created by every person Main instrument is a competent to contract Memorandum and Articles of Association Main instrument of any public charitable trust is the trust deed. The profits, if any, or 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 Governed by Indian other income must be applied for promoting the objects of the company No dividend pay-out to its members have to be obtained to allow non residents/ foreign citizens as trustees © Deloitte & Touche LLP and affiliated entities. 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 16 © Deloitte & Touche LLP and affiliated entities. Contacts Arvind Vijh 416-643-8990 [email protected] Rajiv Mathur 416-643-8920 [email protected] © Deloitte & Touche LLP and affiliated entities. © Deloitte & Touche LLP and affiliated entities.