Need to waive tax, VAT on private universities
Tuesday, 17 May 2011
A K M Atiqur Rahman
Government budget, in its ordinary meaning, is a record showing the projected income and expenditure of the government for a fiscal year with detailed source of revenue and allocation of expenditure that is consistent with government fiscal policy to promote overall socio economic goal. Budgetary policy not only provides signal about government's policy and attitude towards particular sector and activities, it can influence particular activities either by financial support andor by incentivedisincentive by tax policies. The government of Bangladesh prepares budget every year through a lengthy process which is placed before the National Assembly for approval. Encouraging enough, recently there is a trend to accommodate suggestions made by the stakeholders either at the consultative meetings with government officials or at the press releases made by the trade bodies. Unfortunately, the government imposed some form of VAT and IT on non government universities unilaterally in some previous budgets. While public universities operate with almost 100 per cent government financial support, non government universities do no get any such support from the government; rather they are now subject to taxes. The issue needs careful reconsideration for the sake of higher education in the country. Education in general and higher education in particular is quite important for a nation for its advancement. Knowledge and human capital has been increasingly supplementing physical capital as a means of production and sources of growth. In developing countries like Bangladesh, higher education is critically important as it can play important role in transforming huge population to human resources. Education is a "merit good" whose social benefit is higher than private benefit. Economic theory suggests government support in providing merit good. Cost of providing higher education is too high. In this backdrop, higher education in Bangladesh emerged only as public sector activities. There are now 31 public universities whose establishment and development is virtually funded by the government (except little foreign assistance). Tuition realised from the student is quite nominal. These public universities virtually run fully on the tax payers' money. In the fiscal year 2008-09 public universities were granted Tk 7.46 billion from the national budget. With the increase in population, per capita income, and primary and secondary enrollment ratio, demand for higher education was increasing considerably and public universities were unable to meet the demand for higher education. In addition to this demand supply gap, there was a need for profession oriented higher education that was not provided much by the public universities. Since the enactment of Private University Act, 1992, private universities continued to grow in terms of number, enrollment and diversity of programmes. At present (2009), 51 non government universities are providing higher education to more than 2.0 million students, that accounts for about 55 per cent of the total university going students. These non government universities are playing an important role in the economy in ways such as: l Meet growing demand for higher education. l Reduce pressure on government budget to finance ever growing demand for higher studies. l Retain hard earned foreign currency, as many students would prefer to go abroad in the absence of the programmes in private universities. l Generate employment, reduce brain drain. l Contribute to national exchequer in terms of personal income tax. Despite such important role of the private universities, the government introduced some taxes on private universities. These include 15 per cent VAT on operating surplus and 15 per cent VAT on rented buildings. We believe that any form of taxation on private universities is undesirable and unjustified. Several arguments can be put forward against such taxes on private universities. Education is a merit good: The idea of imposing tax on merit good is completely opposite to the policy implications of standard economic theory. Principles of taxation and equity: With massive expansion of students, it is now obvious that students from middle class and lower middle class or even poor families come for education in private universities. Hence, taxing the private universities that will create burden on students will not be equitable. While one group of students is studying virtually free (i.e. students in the public universities) and other group is paying price for their own education, it will be quite unfair to impose tax on the later group by any standard of social justice. Tax may hamper infrastructure development: VAT on rents paid on rented building would reduce investible surplus. Taxes on operating surplus would reduce available fund for campus development. While, as per Private University Act, such universities have obligation to move to their own campuses within the shortest possible time, taxes on them may slowdown the process. Inconsistency of taxes with the spirit of a university and the legal issues: Universities are not business organisations. They are educational institutions and they do not run on commercial basis. Hence, imposing income tax on universities is inconsistent with the spirit and functioning of non-government universities. Moreover, it also contradicts some of the earlier relevant SROs of the government. Private universities in Bangladesh now plays crucial role not only by providing higher education to a growing number of students, it also makes important contribution to the overall economy in many ways. Hence, government should encourage development of such universities. Imposition of VAT and taxes may hinder development of these universities. Actually, income tax is not imposed on any universities of the SAARC countries and also anywhere in the world. Universities rather get support from the government. In the developed countries, even the private universities get support from the government particularly for research activities. Keeping all these in mind the paper proposes following fiscal measures that should be incorporated in the coming national budget for FY 2011-12. (i) Complete withdrawal of 15 per cent income tax on the 'operating surpluses' of the private universities. (ii) Complete withdrawal of 15 per cent VAT on rents paid for rented building used by the private universities. (iii) If possible, government may keep moderate allocation for research fund that could be distributed among the private and public universities on competitive basis. Dr A K M Atiqur Rahman is a Professor of Economics at the North South University, Dhaka. He can be reached at e-mail: akmatiq@northsouth.edu
Government budget, in its ordinary meaning, is a record showing the projected income and expenditure of the government for a fiscal year with detailed source of revenue and allocation of expenditure that is consistent with government fiscal policy to promote overall socio economic goal. Budgetary policy not only provides signal about government's policy and attitude towards particular sector and activities, it can influence particular activities either by financial support andor by incentivedisincentive by tax policies. The government of Bangladesh prepares budget every year through a lengthy process which is placed before the National Assembly for approval. Encouraging enough, recently there is a trend to accommodate suggestions made by the stakeholders either at the consultative meetings with government officials or at the press releases made by the trade bodies. Unfortunately, the government imposed some form of VAT and IT on non government universities unilaterally in some previous budgets. While public universities operate with almost 100 per cent government financial support, non government universities do no get any such support from the government; rather they are now subject to taxes. The issue needs careful reconsideration for the sake of higher education in the country. Education in general and higher education in particular is quite important for a nation for its advancement. Knowledge and human capital has been increasingly supplementing physical capital as a means of production and sources of growth. In developing countries like Bangladesh, higher education is critically important as it can play important role in transforming huge population to human resources. Education is a "merit good" whose social benefit is higher than private benefit. Economic theory suggests government support in providing merit good. Cost of providing higher education is too high. In this backdrop, higher education in Bangladesh emerged only as public sector activities. There are now 31 public universities whose establishment and development is virtually funded by the government (except little foreign assistance). Tuition realised from the student is quite nominal. These public universities virtually run fully on the tax payers' money. In the fiscal year 2008-09 public universities were granted Tk 7.46 billion from the national budget. With the increase in population, per capita income, and primary and secondary enrollment ratio, demand for higher education was increasing considerably and public universities were unable to meet the demand for higher education. In addition to this demand supply gap, there was a need for profession oriented higher education that was not provided much by the public universities. Since the enactment of Private University Act, 1992, private universities continued to grow in terms of number, enrollment and diversity of programmes. At present (2009), 51 non government universities are providing higher education to more than 2.0 million students, that accounts for about 55 per cent of the total university going students. These non government universities are playing an important role in the economy in ways such as: l Meet growing demand for higher education. l Reduce pressure on government budget to finance ever growing demand for higher studies. l Retain hard earned foreign currency, as many students would prefer to go abroad in the absence of the programmes in private universities. l Generate employment, reduce brain drain. l Contribute to national exchequer in terms of personal income tax. Despite such important role of the private universities, the government introduced some taxes on private universities. These include 15 per cent VAT on operating surplus and 15 per cent VAT on rented buildings. We believe that any form of taxation on private universities is undesirable and unjustified. Several arguments can be put forward against such taxes on private universities. Education is a merit good: The idea of imposing tax on merit good is completely opposite to the policy implications of standard economic theory. Principles of taxation and equity: With massive expansion of students, it is now obvious that students from middle class and lower middle class or even poor families come for education in private universities. Hence, taxing the private universities that will create burden on students will not be equitable. While one group of students is studying virtually free (i.e. students in the public universities) and other group is paying price for their own education, it will be quite unfair to impose tax on the later group by any standard of social justice. Tax may hamper infrastructure development: VAT on rents paid on rented building would reduce investible surplus. Taxes on operating surplus would reduce available fund for campus development. While, as per Private University Act, such universities have obligation to move to their own campuses within the shortest possible time, taxes on them may slowdown the process. Inconsistency of taxes with the spirit of a university and the legal issues: Universities are not business organisations. They are educational institutions and they do not run on commercial basis. Hence, imposing income tax on universities is inconsistent with the spirit and functioning of non-government universities. Moreover, it also contradicts some of the earlier relevant SROs of the government. Private universities in Bangladesh now plays crucial role not only by providing higher education to a growing number of students, it also makes important contribution to the overall economy in many ways. Hence, government should encourage development of such universities. Imposition of VAT and taxes may hinder development of these universities. Actually, income tax is not imposed on any universities of the SAARC countries and also anywhere in the world. Universities rather get support from the government. In the developed countries, even the private universities get support from the government particularly for research activities. Keeping all these in mind the paper proposes following fiscal measures that should be incorporated in the coming national budget for FY 2011-12. (i) Complete withdrawal of 15 per cent income tax on the 'operating surpluses' of the private universities. (ii) Complete withdrawal of 15 per cent VAT on rents paid for rented building used by the private universities. (iii) If possible, government may keep moderate allocation for research fund that could be distributed among the private and public universities on competitive basis. Dr A K M Atiqur Rahman is a Professor of Economics at the North South University, Dhaka. He can be reached at e-mail: akmatiq@northsouth.edu