Tax Exposures For Foreign Higher-Ed Institutions in India
About the Authors
Kapil is an entrepreneur of established business acumen with nearly two decades of experience in investing, establishing and expanding businesses around the world. As a qualified Chartered Accountant, Kapil has supported a wide range of well-known brands, business houses and HNI’s to manage compliances, regulatory hurdles, and expansion in India and other challenging markets.
In 2008, Kapil established Sannam S4 with the vision of providing one-stop support to international entities entering and expanding in the multisectoral Indian market. At Sannam S4, Kapil also represented UK India Business Council and Jersey Finance Limited, promoting the trade and investment between India, UK, and Jersey. In the last few years, Kapil has set up and expanded Sannam S4 group entities and operations in the UK, USA, and Brazil.
Presently, Kapil is a leading advisor and board member to Ivy League and other reputed Higher Education Institutions in the USA, Fortune 500 and FTSE 100 Companies and international-minded SME’s for their expansion into India and Asian Pacific markets.
Abhinav Sood is a qualified Indian Chartered Accountant with nearly 13 years of experience in market entry, tax and regulatory advisory, M&A and financial consulting. Based out of our New Delhi office, Abhinav spearheads the firm’s advisory and international practices and provides organizations with in-depth, pro-active solutions in financial, tax & regulatory matters. The value and expertise he brings to the table have been greatly appreciated by peers and customers.
Prior to Sannam S4, Abhinav was associated with the Big 4 and a leading tax advisory firm in their M&A and corporate tax domains, where he is credited with undertaking various initiatives for foreign and domestic clients. He was also actively involved in building a new transfer pricing practice for his previous firm.
Abhinav also actively supports Sannam S4 and the firm’s clients in replicating their India success into other key markets such as China, Hong Kong, UAE, Singapore, and other core Asian countries.
As we write this article, the COVID-19 Pandemic is engulfing our world and invoking unprecedented responses and strategies. Global sectors are facing drastic challenges that re-defines the basic modalities of running international operations. The coming years, probably at-least the first-half of this decade, will see a paradigm shift where economies, institutions, and companies will not only re-orient themselves but will also change their cultures and ecosystems. Within this re-alignment, the international higher-education sector shall be at the forefront of this change.
Despite these uncertain times, India will emerge stronger than ever, and continue to be a top destination for attracting global institutions to meet all or most of their international objectives. These include, inter alia:
- Student recruitment;
- Partnerships with local institutions, corporates, and governments;
- Executive & Online education (a key COVID-19 response strategy);
- Consulting, research and other commercial and non-commercial projects;
- Public welfare initiatives;
- Corporate Social Responsibility projects and advisory; and
- Back-office staff and centers;
- Other university focused needs for international expansion
For all of the above, India shall remain a key market for foreign education.
However, with any such initiative, one key factor that all global institutions need to strategize for in advance is the impact of taxes in India. India has a robust but very dynamic tax framework, with a long-winded litigation system that leads to significant tax and cost leakages, if not properly planned for. In some cases, it can even render a project unviable and there are many ‘horror stories’ of institutions not able to achieve their plans due to tax costs and compliance requirements taking a toll on their focus. In our experience, we can highlight a few key regulations that require a proper assessment of tax costs, recognizing potential savings / alternate strategies for implementation and understanding compliance requirements. The most important ones are:
- Permanent Establishment (‘PE’) and withholding tax exposures under Double-Taxation Avoidance Agreements between India and respective home jurisdiction(s), when reading in conjunction with local corporate tax laws.
- Corporate income tax implications on local offices and projects, including availing tax exemptions, if any, for non-profit entities set up in India, as well as transfer pricing/margin requirements for related party transactions under for-profit structures.
- Individual tax aspects for local hires as well as expatriate personnel working for or on behalf of the institution.
- Goods and Services Tax (‘GST’) implications on local as well as international transactions, especially recent interpretations and judicial precedents on key areas of services related to education or the not-for-profit sector.
- Custom duty costs and compliance requirements for any export and import of goods from/to India.
Foreign Institutions must set up dedicated plans and/or structures with their accountants/advisors and internal tax and legal counsels to ensure that all or any of the above factors are duly evaluated prior and during implementation.
To cite a few examples:
- A lot of litigation has emerged recently with regard to GST on intermediary services for the higher-ed sector since the advent of the new law in India. Recent judicial precedents have confirmed and given re-birth to a controversy that all student recruitment activity through partners/agents and service providers in India, as well as other projects where a local institution or agency acts as an “intermediary” between the University and a third party, will result in additional GST @ 18% on the transaction value.
- There have been audits conducted by tax authorities wherein a PE argument is raised against a foreign institution which has local personnel engaged directly in India, or staff/faculty travelling into the country beyond threshold limits prescribed under the relevant tax treaty, and furnishing services locally. This leads to a minimum 40% tax exposure (plus surcharge and cess) on the institution’s profits as a PE in India, with the manner of determination of profits being a case study in itself. Furthermore, such individuals are also subject to individual tax costs and compliances on their personal income attributed or earned in India.
- Umpteen number of cases have also come up for any research material, marketing material or lab and technology equipment shipped by Universities into India, which get stuck at custom ports for lack of complete/accurate documentation. The delay as a result of this leads to significant unplanned costs on storage/demurrage, increased freight as well as last-ditch efforts to bring in high-cost consultants to sort matters out with authorities.
- The mandate for having a minimum transfer pricing margin for related party transactions (esp. funding coming into the country for institution’s own for-profit subsidiaries or offices in India) does increase project costs by a minimum of 15-20% under general circumstances.
To sum up, as we’ve re-iterated above, it becomes imperative for stakeholders to pro-actively seek opinions from internal as well as external advisors on tax implications for each of their initiatives in India. This is a continuous process which starts prior to any engagement but continues throughout the life cycle of a project due to the dynamic nature of Indian laws & regulations. While many of the above implications are very similar for other high-growth countries that Foreign Institutions operate in, the complexity of a law that encompasses over 1.3 billion people (and possibilities) does make a compelling argument for the need to be proactive.
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