In this blog post, Sudipta Ghosh, a student of Surendranath Law College, Calcutta University and who is currently pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, writes about the taxation procedure in an Educational Institution.

Introduction

An educational institution is a place which imparts education to people of various age groups and is of various types including pre-schools, universities, elementary schools, high schools, stream specific colleges, etc. Educational institutions may also be defined as establishments that provide services relating to education to individual or other educational institutions. The expression ‘educational institution’ means institutions that impart education where education is as understood hereinabove.[1] An educational institute may be managed by the government, private body, local authority, university or any other person. “Educational Institution” means any institution imparting education referred to insection 3 and includes a private Educational Institution but does not include an institution under the direct management of the University or of the Central Government or a tutorial institution”[2] .

Taxation of educational institutions is a very complicated concept. This is because the apparent sole purpose of any educational institution would be imparting education only which is a noble, charitable, social service. Then how can a social service be taxed? At the same time we have seen the mushrooming of innumerable educational institutions wherein degrees can be bought with high capitation fees. These types of institutions exist for making profits only often at the cost of an innocent students’ parents hard-earned income. Can this kind of educational institution be described as one existing for noble purposes? Thus, the taxation policy of educational institution cannot be generalized. It has to be dealt with in a case to case basis. Also, it may be mentioned here that the activities of educational institutions always needs to be kept under the scanner for identifying any kind of shift away from set norms and rules which will in turn reverse/change the taxation policy.

Elaborating on the above concept with the purpose of giving it more clarity, the concept of taxation can be discussed as follows:

Taxation of an educational institution depends upon its registration i.e. separate rules would apply for registration under separate act. An educational institution may be registered as a charitable trust, as a society under the society’s registration act1860, a company or in the name of an individual proprietor.

Now let us discuss the taxation policy in each case of registration of the educational institution.

Registration as a charitable trust

An educational institution may be registered as a trust under the Indian trusts Act 1882. Trusts are formed by a trust deed, prepared on a stamp paper of requisite value (the value varies from state to state) containing trustee information, rights, duties, operation of trust, liabilities and the most important information among all of the above mentioned, the object of the trust i.e whether religious or charitable. Genrally an educational institution is formed under the head of charitable institution. The trust deed must be submitted to the local registrar along with all the prescribed requirements and at the time of such registration the settler and two witnesses with proof of identity must be present. The registrar shall retain a photocopy of the trust deed and return the original registered one. After registration the trust must apply for a PAN card as it is amust for income tax registration with the income tax department, Government of India. Here sec12A of the income tax plays role. After the trust has received the income tax certificate under section 12A, it can apply for various tax exemptions for donors as well. Such as an application can be submitted under Sec 80G for 100% deduction but there is a condition to it. The institution must be of national eminence. It can be any educational institution registered under 12A of the Act including a university.

Registration of an educational institution as a SOCIETY

An educational institution may be registered under the Societies Registration Act 1860. A society may be formed by an association of 7 or more persons for charitable, literary, scientific purposes as defined in section 20 of the act. The associated 7 persons have to subscribe their name in memorandum of association and file the same with registrar of joint stock companies. As per the provison of sec 12A of the income tax act, income of an organisation is exempted if NGO has 12A registration. If registration under section 12 A is not done, the NGO or organisation must pay income tax on the surplus income during the year. This registration under section 12A is a one-time registration.

Registration as a company

If an educational institution is registered under the Companies Act 1956, then we may say that it is registered as a Company. When an educational institute is registered as a Company it does not mean that it is for the purpose of making profit only. In fact such steps taken by big companies are a part of their Corporate Social Responsibility and a part of their profit generated from other businesses are utilized in the making of an educational institution for charitable purposes.

Hence as it does not violate the fundamental concept of educational institution as institution for imparting education only and not for making profit, the system of taxation is lenient and much like other clauses mentioned above.

Registration as Sole Proprietorship

As we know, sole proprietorship may be defined as a business enterprise owned by a single person who has entire responsibility and authority with respect to such business. Educational institutes run in the name of a single individual, who has solely invested his capital comes under such category. These types of institutions are normally small-scale like a small coaching institute, a pre-primary or primary school etc. In this case taxation is done on the name of the individual in whose name the institution is registered.

Educational Institutions exempted from payment of Taxes:

Government institutions – Those educational Institutes which are wholly or substantially financed by the Government (either Union or State) are exempted from payment of taxes under section 10(23C) sub clause iii(ab) of the Income Tax  Act. This is because such educational institutes are considered to exist solely for educational purposes and not for the purpose of profit.

The second category of educational institutions which are exempted from payment of taxes are those which exist for the purpose of education only and not for making any profit and whose annual receipts do not exceed Rs. 1 crore.

Any educational institution which does not fall in the above two categories but have been approved by the prescribed authority for exemption may be exempted from payment of taxes.

For claiming exemption the certain statutes need to be followed by educational institutions. These are:

1. The property must be held by a trust or as a legal entity
2. It must be for charitable purposes, i.e. for general public utility and no part of its income can go for the satiation of needs of any particular individual.
3. The accounts of the institiute can be audited if need arises.

Withdrawal of exemption

The privilege of exemption from taxation by any educational institution is not permanent but is subject to change as well. The prescribed authority who had given the exemption reserves the right to withdraw such exemption if any of the following conditions arises:-

1. In case the prescribed authority has reason to believe that the income generated by these institutions is not being applied for educational purposes solely but are being siphoned off for meeting personal interests, then the prescribed authority reserve s the right to withdraw such exemption.
2. If the institution violates any of the clauses under which it had been given tht exemption or if it is suspected that the activities of the institution are not genuine then the exemption may get cancelled.

However, before withdrawing such approval, they must be given an opportunity of being heard. Thus, this is a quasi-judicial process.

Whatever may be the type of educational institution, all of them have to file returns and get their accounts audited by a Qualified Accountant and must furnish such report in prescribed form.

CONCLUSION – The Honorable Supreme Court in a landmark judgment has specifically stated that even if an educational institution makes any kind of income which may be a surplus it does not mean that it becomes a profit making company. It would not mean that the institution would cease to be an educational institution. This particular judgment has come as a relief to many educational institutions which were strangulated by strict assessment and income tax calculation leading to mammoth demand notices. Thus it can be concluded that those educational institutions which live up to its task of imparting education only without any profit motive are not taxed by the Government.

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Reference

1. https://indiankanoon.org/doc/91472407/
2. http://mhrd.gov.in/university-and-higher-education
3. www.incometaxindia.gov.in
4. https://indiankanoon.org/doc/1353758/

[1] T.M.A.Pai Foundation & Others (supra), para 20, page 13, indiankanoon.org/doc/91472407/

[2] Karnataka Educational Act, 1983 (Act No.1 of 1995) , section 2(14)