Taxations of private universities
M. A. Baree, FCA | Thursday, 26 June 2008
RECENTLY I have received queries from some private universities, specially from their treasury department regarding their taxation position. The confusion arises from common perception that private universities are engaged in imparting education established solely to do so as a non-profit making institutions. In the process, they may have operational surplus or profit which is not distributable amongst the sponsors but is meant basically for further development like infra-structure, faculty library etc. Unlike other commercial organisations, their motive is to further the cause of education rather than making profit for the benefit of the sponsors and, therefore, the surplus is non-taxable.
Against this perception, the government took a different view of the commercial pursuit of private universities and found strong profit motive in their establishment and running since tuition and other fees are realised at full market rate with the hidden object of making operational surplus which is taxable.
To clear myself out of this confusion I have tried to collect and study the relevant Statutory Regulatory Orders (SROs) issued by the National Board of Revenue (NBR) on different occasions. In the following paragraphs, I have summarised and interpreted those SROs with the aim to enable concerned private universities to gain understanding on their taxation status and to estimate the tax liability.
Back in December 31, 1980, the first SRO 454-L/80 was issued exempting amongst others universities and other educational institutions from tax which reads as follows:
'the, income of a university or other educational institution existing, solely for educational purposes and not for purposes of profit', shall not be taken into account in determining the total income of an assessee.
As a matter of fact, there has not been any private university in the country at that time and all public universities being heavily subsidised and founded by the Government, are in real term tax exempt since they never made or would make operational surplus.
In the 90s, the concept of private universities gained momentum and the government enacted Private Universities Act 1992 and, following that, varieties of private universities numbering about 52 have been established in the country. Most of their sponsors are businessmen, whether their motive is to make profit out of the university operations is a matter of prejudgement, but one thing is sure that they know how to make business without themselves having BBA or MBA they very quickly scanned the internal environment and started awarding business degrees charging tuition fees at commercial rate from a huge and ever increasing business students.
The scenario prompted the NBR to issue second SRO No 178-IT/2002 in 2002 amending the earlier SRO No 454-L/80, which reads as follows:
'the income of any university or any other educational institution, which is not operated commercially and also medical college, dental college, engineering college and institution imparting education on information technology' shall be exempt from tax.
Here the NBR repeated its emphasis and direction towards commercial operations but never defined 'commercial' in any precise terms that created real controversy regarding the tax liability of private universities. At the assessment stage, the stance taken was the charging of commercial rate that definitely results in surplus or profit, whatever may be termed, and as such taxable. Assessee universities however, argued that the surplus or profit can not distributed to the sponsors and can only be spent for further expansion and development of the universities. In the absence of commercial objective, the income, in their view should be exempt even when they charge commercially. In fact the assessing officer took the view on source of income whereas the universities argued on its destination. Any way, Appellate Tribunal confirmed the view of the assessing officers. Against this, the second appeal to the High Court is still lying and I would not like to comment upon such sub judicial matter.
Besides, above SRO exempts specifically following four classes of institutions from tax, irrespective of the fact they run commercially or non-commercially;
i. Medical College
ii. Dental College
iii. Engineering College
iv. Institution imparting education on IT
But above institutions would have to submit tax return within scheduled time annually accompanied by audited financial statements. However, public universities shall remain exempt and they are not required to file annual tax return either.
The third and final SRO No 158-L/IT/2007 was issued on June 28, 2007 which fixed up tax @ 15 per cent on income of all private and other non-public universities approved by the University Grants Commission, effective from July 01, 2007. In other words, 2007-08 i.e. income earned during July 01, 2006 to June 30, 2007 would be subject to tax under this SRO.
Though tax @ 15 per cent is fixed, there is a provision to calculate it, based on the slab/schedule applicable to individual, firm or association of person. Tax liability would then be the lower of 15% on taxable income at flat rate or whatever results in the application of slab.
Because of this, universities whose taxable income (not the accounting income) does not exceed Tk 1.3 million precisely would benefit and beyond that it would be pointless to apply the slab since tax liability would be higher than 15% flat rate.
Assuming that all private universities are taxable, complication may arise where some universities offer taxable as well as non-taxable courses. For instance, business studies (taxable) are offered along with engineering (exempt). There is no guideline from the NBR as yet on the matter of income determination of respective taxable and exempt programmes. However, applying the experiences of commercial organisation where some of its activities are taxable and some enjoy tax exemption or holiday, separate books of accounts shall have to be maintained to be certified as such by a public accounting firm.
The question may also arise about taxation of interest income earned by private universities at higher rate on fixed deposit receipt (FDR) as required by the Private Universities Act 1992. There are other similar and parallel cases in taxation history where such income on compulsory deposit has been taxed at entity tax rate rather than separately, plainly such interest income should also be taxed @ 15%.
Assuming further that the income of taxable courses would be taxable, it is suggested that private universities should make necessary provision in their accounts from the assessment year 2007-08 for tax liability and to consider payment of advance tax u/s 64 of ITO, 1984 for the assessment year 2008-09. Otherwise they may end up with interest and penalty.
SRO No 157-Law/IT/2007 issued on June 28, 2007 allows research organisations registered under Trust Act 1882 to pay tax at the reduced rate of 15 per cent or the amount based on applicable tax slab whichever is lower. Such organisations, when not registered as such, shall have to pay full tax from assessment year 2007-08.
The writer is Partner, Hoda Vasi Chowdhury & Co, Chartered Accountants
Against this perception, the government took a different view of the commercial pursuit of private universities and found strong profit motive in their establishment and running since tuition and other fees are realised at full market rate with the hidden object of making operational surplus which is taxable.
To clear myself out of this confusion I have tried to collect and study the relevant Statutory Regulatory Orders (SROs) issued by the National Board of Revenue (NBR) on different occasions. In the following paragraphs, I have summarised and interpreted those SROs with the aim to enable concerned private universities to gain understanding on their taxation status and to estimate the tax liability.
Back in December 31, 1980, the first SRO 454-L/80 was issued exempting amongst others universities and other educational institutions from tax which reads as follows:
'the, income of a university or other educational institution existing, solely for educational purposes and not for purposes of profit', shall not be taken into account in determining the total income of an assessee.
As a matter of fact, there has not been any private university in the country at that time and all public universities being heavily subsidised and founded by the Government, are in real term tax exempt since they never made or would make operational surplus.
In the 90s, the concept of private universities gained momentum and the government enacted Private Universities Act 1992 and, following that, varieties of private universities numbering about 52 have been established in the country. Most of their sponsors are businessmen, whether their motive is to make profit out of the university operations is a matter of prejudgement, but one thing is sure that they know how to make business without themselves having BBA or MBA they very quickly scanned the internal environment and started awarding business degrees charging tuition fees at commercial rate from a huge and ever increasing business students.
The scenario prompted the NBR to issue second SRO No 178-IT/2002 in 2002 amending the earlier SRO No 454-L/80, which reads as follows:
'the income of any university or any other educational institution, which is not operated commercially and also medical college, dental college, engineering college and institution imparting education on information technology' shall be exempt from tax.
Here the NBR repeated its emphasis and direction towards commercial operations but never defined 'commercial' in any precise terms that created real controversy regarding the tax liability of private universities. At the assessment stage, the stance taken was the charging of commercial rate that definitely results in surplus or profit, whatever may be termed, and as such taxable. Assessee universities however, argued that the surplus or profit can not distributed to the sponsors and can only be spent for further expansion and development of the universities. In the absence of commercial objective, the income, in their view should be exempt even when they charge commercially. In fact the assessing officer took the view on source of income whereas the universities argued on its destination. Any way, Appellate Tribunal confirmed the view of the assessing officers. Against this, the second appeal to the High Court is still lying and I would not like to comment upon such sub judicial matter.
Besides, above SRO exempts specifically following four classes of institutions from tax, irrespective of the fact they run commercially or non-commercially;
i. Medical College
ii. Dental College
iii. Engineering College
iv. Institution imparting education on IT
But above institutions would have to submit tax return within scheduled time annually accompanied by audited financial statements. However, public universities shall remain exempt and they are not required to file annual tax return either.
The third and final SRO No 158-L/IT/2007 was issued on June 28, 2007 which fixed up tax @ 15 per cent on income of all private and other non-public universities approved by the University Grants Commission, effective from July 01, 2007. In other words, 2007-08 i.e. income earned during July 01, 2006 to June 30, 2007 would be subject to tax under this SRO.
Though tax @ 15 per cent is fixed, there is a provision to calculate it, based on the slab/schedule applicable to individual, firm or association of person. Tax liability would then be the lower of 15% on taxable income at flat rate or whatever results in the application of slab.
Because of this, universities whose taxable income (not the accounting income) does not exceed Tk 1.3 million precisely would benefit and beyond that it would be pointless to apply the slab since tax liability would be higher than 15% flat rate.
Assuming that all private universities are taxable, complication may arise where some universities offer taxable as well as non-taxable courses. For instance, business studies (taxable) are offered along with engineering (exempt). There is no guideline from the NBR as yet on the matter of income determination of respective taxable and exempt programmes. However, applying the experiences of commercial organisation where some of its activities are taxable and some enjoy tax exemption or holiday, separate books of accounts shall have to be maintained to be certified as such by a public accounting firm.
The question may also arise about taxation of interest income earned by private universities at higher rate on fixed deposit receipt (FDR) as required by the Private Universities Act 1992. There are other similar and parallel cases in taxation history where such income on compulsory deposit has been taxed at entity tax rate rather than separately, plainly such interest income should also be taxed @ 15%.
Assuming further that the income of taxable courses would be taxable, it is suggested that private universities should make necessary provision in their accounts from the assessment year 2007-08 for tax liability and to consider payment of advance tax u/s 64 of ITO, 1984 for the assessment year 2008-09. Otherwise they may end up with interest and penalty.
SRO No 157-Law/IT/2007 issued on June 28, 2007 allows research organisations registered under Trust Act 1882 to pay tax at the reduced rate of 15 per cent or the amount based on applicable tax slab whichever is lower. Such organisations, when not registered as such, shall have to pay full tax from assessment year 2007-08.
The writer is Partner, Hoda Vasi Chowdhury & Co, Chartered Accountants