Universities could be at risk of 40% tax on profit in India

Some universities that have been recruiting via in-country officers in India may be at risk of back-dated income tax invoices amounting to millions of pounds, stakeholders have warned.

Experts have suggested that the Narendra Modi government could look to take a cut from international recruiting universities that have benefitted from the vast numbers of students and funds exiting the country in recent years.

While no policies have been announced by Delhi, they say that permanent establishment in India may be one area where government officials could seek tax revenue. The worst-case scenario could see universities hit by 40% income tax on profit they have earned from students resident in India in the past five years.

Depending on the activities performed by in-country representatives, a university could be alleged to constitute a PE in India by authorities, Kapil Dua, CEO of Seamless, part of Sannam S4 Group, detailed.

“This would eventually lead to compel a university to register with local authorities, maintain India related books of accounts and most importantly pay as high as 40%++ taxes in India on revenue/profits earned from students resident in India,” he said.

In-country reps’ conduct, representation and activities need to be “carefully analysed”, Dua stated, as will that of international recruitment staff travelling to India for the purpose of student recruitment for a period or periods aggregating more than 90 days within any 12-month period.

“Universities using independent contractors face the highest risks”

There are concerns that the government’s tax policy is becoming increasingly unpredictable and aggressive in scrutinising foreign universities’ operations in India.

Tax authorities in the country took action against IDP in 2021, saying the agent was liable to pay service tax on the commission received. The case however eventually ruled in favour of IDP.

However, risks that universities face with in-country recruitment staff in India will differ significantly depending on how their presence is structured, Grok Global said. It emphasised that its clients do not need to make any changes as the company is “fully compliant with all relevant laws in India, including Goods and Services Tax”.

“Universities using independent contractors face the highest risks, ranging from worker misclassification to limited protections, to potential tax implications from GST or PE,” Grok CEO Alex Green said.

“Institutions that are operating a fully-compliant, wholly-owned registered company in India have accepted the legal and tax implications of doing so, in addition to the substantial costs.”

Those universities not working with compliant service providers “should seek tax advice to protect themselves and their local staff, as the tax authorities are empowered to levy up to five years of retroactive taxes if the operational structure is deemed taxable”, the company added.

Founder and director of OneStep Global Aritra Ghosal agreed, urging universities setting up in-country operations to be “very mindful” of PE, tax, data privacy laws, among other things.

“It is only recommended to universities to trust established players, in the region, who have the necessary checks and balance for this model to work,” he said.

Sannam S4 has introduced a best practice guide for its partner universities and is giving them three months to make changes before it will run an internal audit.

Advisory firm Ernst and Young has been consulted by the company to analyse which changes are needed. Many are around ensuring in-country officers are not seen as employees of institutions.

Examples of urgent amendments are ensuring business cards do not describe representatives as university employees or include university logos. Using university business cards is described as a “fatal” risk that must be avoided. University domain names for in-country representative emails should also be prevented.

Also featured in the FAQs is job descriptions on platforms such as Linked-In. If an individual acting as an in-country officer is listed as an employee of the university, authorities in India may view that as PE and go after the university for tax dollars, the document warns.

Communication must only go via service providers and never be seen directly going straight to in-country officers, it added.

Stakeholders agree that there is a lot of grey area regarding tax policy and PE, but there is no consensus on the size of the risk for universities.

They warn that universities working with individuals on exclusive contracts, or with consultants or a sole proprietorship firms, may be at greater risk of attracting attention from tax authorities.

Several in-country service providers have highlighted that if a university is found to be on the wrong side of the tax man in India, it places the rest of the sector at risk.

Tax risk in India is ultimately a three-pronged issue, Grok added. It spans GST being applied to funds transferred into India, to income tax being applied to profits earned from locally resident students enrolled in online programs or TNE in-country, and to income tax being applied to profits earned from Indian students who study abroad.

“Recent initiatives by the tax authorities in India relating to the international education sector have focused on GST collection,” Geetanjali Sharma, executive director for South Asia at Grok added. “Our tax advisors confirm that it appears our sector is ‘in focus’ for the GST authorities at the moment.”

Grok noted that until official statements or directives signal that tax authorities intend to assess the PE status of institutions with in-country recruitment staff, rumours “remain highly speculative”.

“There is no direct precedent in our sector”

“It’s interesting to note that for institutions at risk of being declared to have PE in India due to having in-country recruiters, the financial implication is unclear, since there is no direct precedent in our sector,” Sharma said.

The warnings come after a number of international companies operating in India have been raided by authorities. BBC offices were raided earlier this year with employees’ phones confiscated after the broadcaster aired a documentary about the Indian prime minister.

Twitter’s co-founder recently said that India had previously threatened to close the company’s offices in India and raid employees’ homes if the social media platform refused to remove posts and accounts.

While warnings are based on a theoretical intervention, there could be “numerous unintended consequences” if tax authorities were to proceed along PE-related lines.

“Foreign institutions may decide to pass on the additional tax burden to the Indian students themselves,
increasing the financial strain on them and their families,” Grok warned.

“As well, this initiative could sour India’s relationship with foreign universities just as the execution of NEP 2020 continues to ramp up.”

Dua added that it’s “essential” for universities to conduct deep dive analyses of their existing and future operations in India, especially as new forms of student recruitment, enrolment, TNE initiatives evolve.

“There are a number of new tax laws and regulations that’ll need to be kept in mind to avoid any obvious pitfalls and potential challenges.”

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