Education is no more a charity, it is a big business. Despite earning huge income, most educational institutions enjoy tax exemption since they are registered as charitable trust. Can we plug this loophole, asks Prof Anil Agashe?
Dear Finance Minister,
This is not regarding your budget. It is about a big tax avoidance scam that is not a scam simply because it has the sanction of the law of the land. You have also made it clear that tax evaders are being sent notices and they better declare incomes and pay tax. But what do we do about tax laws that allow tax avoidance or evasion it really does not matter. What matters is the country is being taken for a ride.
Most educational institutions are registered as “charitable trusts” in our country and because of this all their income is exempt from tax. What a noble idea indeed Sirji! May be this was fine at the time of independence. In that era there were mad people who were running educational institutes as a patriotic duty.
Things have changed beyond recognition since then. Now education is a big business. Many politicians have jumped on this bandwagon because it is a great vehicle to grab land free or at throw away prices all over the country. Many private institutes and even universities have sprung up which are covertly or overtly backed by politicians of all hues. This is an admirable quality amongst your clan, you fight with each other constantly, ostensibly for the good of the country and we the unfortunate citizens, but when a money making opportunity arises you close ranks.
As I understand that an institution is charitable only as long as it is doing charity of some kind. Educational institutes that charge huge fees and run professional courses and do this with a clear motive of profits, have no business to be called ‘charitable’. There are institutions that make crores of rupees by conducting entrance examinations and sale of prospectus. Is this charity? Should this income not be taxed?
It would be interesting to see what percentage of fees collected by such institutes is spent on academics! In one institute I was told the ratio of payment to faculty to total income was about 2%! What happened to the balance? What charitable things were done? No student gets concession in fees, there are no freeships for poor students either. And best of all many of these institutes are big borrowers, borrowing money from banks to build buildings and to buy computers and books as required by AICTEA.
Now one hears some of these fantastic temples of education do not pay salaries to their employees on time. In Pune I have heard that Sinhgad Institute and Indira Institutes fall under this category. IIPM is a classic case, it does not pay salaries on time, and it even has courage to pay one year’s arrears to their visiting faculties by issuing11 post dated cheques to be deposited at the rate of one cheque per month! And unfortunately we have professors who are willing to go through this humiliation! The faculty and staff have no guts to protest as they fear loss of arrears plus loss of job. This is nothing but exploitation. And Mr Minister the majority of the staff in such institutes may be women! So forget your “Nirbhaya Fund”, how about protecting women who are getting exploited in this organized trade called education?
One reason for thriving of such institutions is the craze for a degree among Indians. That a degree increases the price of a bridegroom in marriage is a proven fact. As a matter of fact many of my students have accepted this and some have even said that we come all the way to Pune and spend so much money because it is an investment that delivers manifold returns once we sell ourselves in the marriage markets!
Sir, this is nothing but money making and profit making business. Schools also are no exception. A play group in a school for two-three year olds who go to school for three-four hours only charges Rs30,000 per year! On the other hand there are government-aided schools where fees are not revised for 25 or more years! Girls irrespective of their parents’ economic status are provided free education in Maharashtra. These girls are dropped to school in chauffer-driven high-end cars! Undergraduate aided colleges charge laughable fees. The students don’t attend classes in college which suits the professors who are overpaid after the Sixth Pay Commission bonanza with no evaluation of performance and guarantee of no punishment for non-performance! These same students attend private coaching classes and pay 10 times more fees to attend them! Many professors in aided colleges actually put in more hours as visiting faculty and were reportedly making more money than their salary. This is an open secret. They are actually not allowed to do this, but then who cares?
So Sir, a humble request education is no more a charity, it is a business that only needs political patronage, which is available in plenty at a cost of course. Please plug this loophole in your taxation policy. And please make sure that the tax is imposed retrospectively, something that you are so fond of! Here is perfect opportunity to do that, which may actually get you even many votes from those who have suffered for years, so it is even politically winnable in an election year!
The women’s bank will pave the way for improving the finances of the entire family, and serve the cause of the whole family admirably. Customer service should take precedent as this new bank can be a trailblazer in taking banking experience to a new orbit of happiness and satisfaction for the women of this country
Finance minister P Chidambaram in his Budget speech asked and said: “Women are at the head of many banks today, including two public sector banks, but there is no bank that exclusively serves women. Can we have a bank that lends mostly to women and women-run businesses, that supports women SHGs and women’s livelihood, that employs predominantly women, and that addresses gender-related aspects of empowerment and financial inclusion? Yes, we can.” He then announced the setting up of India's first women's bank as a public sector bank and provided Rs1,000 crore as initial capital.
In what way exclusive women’s bank is useful?
The idea certainly appealed to women legislators, going by the thumping of the desks by many women MPs including the leader of the opposition, as shown on the TV, during the FM’s announcement. In the long-term interest of empowerment of women and inculcating in them financial literacy, the route proposed by the FM appears to be the best option under the circumstances. Because when women are financially literate, it will certainly pave the way for improving the finances of the entire family, and serve the cause of the whole family admirably. In any case, we are going to have many more banks shortly, as the Reserve Bank of India (RBI) has already announced guidelines for granting licenses to a few more banks in the private sector. If there is a need for more banks in the country as per the assessment of the RBI, why not have one more in the public sector which will cater predominantly to women and serve their needs with sympathy, understanding and concern?
Today, the biggest casualty of computerization of banks is the customer service. In the name of automation, personalized service in most commercial banks has suffered a setback and if a new bank run by women can meet the aspirations of people, specially women, and serve the society by competing with the existing banks in quality of service offered, it is certainly a welcome step in the direction of toning up the entire banking sector. After all women have a natural tendency to handle problems of people with concern and care, and if the same level of care can be extended to the bank’s customers, it will go a long way in improving customer service in all other banks as well.
But setting up a new bank and developing it to a scale and size that spreads its wings pan India will be time consuming, and may take a minimum of ten years to make an impact on the life of women of our country. The lead time required even to set up about 500 branches of this bank with at least one branch in each district may take as much as five years or more, going by the problems faced by the existing banks to set up branches in unbanked areas and to train people to manage these branches. Therefore there is a need to hasten the process of setting up this bank and here are a few suggestions to achieve this objective for the consideration of the government.
Position of female employees in commercial banks in our country:
As on 31 March 2011, the total employee strength of all scheduled commercial banks in the country is said to be 10,50,885 of which females constitute 1,86,784, or just 17.77% of the total employees. You will observe from the following table, regional rural banks (RRBs) have the lowest percentage of female employees, mainly because of low availability of qualified women in rural areas, where the branches of RRBs are predominantly spread out, which calls for providing educational facilities in rural areas a top priority for the government.
Position of employees of all commercial banks as on 31 March 2011 is as under:
|Total employees||Female employees||percentage of females|
|State Bank Group||3,00,628||57,544||19.14|
|Private sector banks||1,71,071||38.297||22.39|
|Regional rural banks||79,886||4,481||5.61|
Source: Basic Statistical Returns of SCBs in India, March 2011 (RBI website)
How to ensure success of the women’s bank?
First and foremost job of the new bank is to have enough trained women employees, who will be able to provide banking services to even the illiterate people of India. In order to speed up the process of setting up branches in rural and semi-urban centres, the best option for the government is to seek the services of female employees on a loan basis in adequate numbers from every public sector bank, so that the new bank is able to get trained and experienced employees to start operating in right earnest, without going through the elaborate process of recruitment, training and skill development. These employees, who opt to work for the new bank can be given the deputation allowance as an incentive for them to move over to the new bank at least for the first three years, where after they can opt to go back to their parent bank or become permanent employees of the new bank.
The next equally important job for the new bank is to set up at lest one branch in every district of our country to begin with, that will provide an all-India presence for the bank and create visibility throughout the country. Though this is a tall order, it is desirable to have branches spread out in as many states as possible, particularly in smaller cities where there is a need to help women who are more conservative and depend on their men folk for their banking requirements.
In order to inculcate a saving habit among the women of our country, it is preferable for the new bank to aggressively go for savings deposits from the entire family with innovative schemes and incentives, which are not provided by the banks at present. This will not only help the bank to keep the costs low, but to the economy as well, as a lot of cash is said to hoarded in the homes of large number of families in the countryside, which can be tapped by the new bank for the general good of our economy.
The new bank should have a totally new business model, which should serve the needs of the society with equanimity and concern for the underprivileged people of our country. It is necessary for the new bank to equip itself with lending to womenfolk against pledge of gold, which is the most prized possession of all women in our country. Today private moneylenders and pawn-brokers do roaring business of lending against gold in all rural areas, and the new bank should, therefore, take upon this task as a challenge to provide loans against gold to all these rural population, who are at the mercy of private money lenders, at reasonable rates of interest, taking due care of the safety of their jewels as well. Besides, the women’s bank should be ready with attractive schemes to encourage girl children to go for higher education by providing education loans at reasonable interest rates, as this can change the face of rural India in the shortest possible time.
What should be the philosophy of the women’s bank?
The need of the hour is to make banking systems and procedures simple, easy and affordable to the common people of our country to make financial inclusion a reality. Today the process of opening a new bank account in any commercial bank is so cumbersome with each bank having its own KYC (know your customer) norms, calling for so many documents. The new bank should make the entire experience of banking as simple as visiting your favourite fast food outlet and walking out with some idlis or wadas. In a nutshell, customer service should take precedent over everything else and this new bank can be a trailblazer in taking banking experience to a new orbit of happiness and satisfaction for the women of this country.
In short, the philosophy of the women’s bank should be to follow both in letter and spirit what Mahatma Gandhi said in his speech in South Africa in 1890 as under:“A customer is the most important visitor on our premises. He is not dependent on us. We are dependent on him. He is not an interruption in our work. He is the purpose of it. He is not an outsider of our business. He is part of it. We are not doing him a favour by serving him. He is doing us a favour by giving us the opportunity to do so.”
And that alone can take this new bank to unprecedented heights of glory and pinnacle of success in all its endeavours.
(The author is a banking analyst and he writes for Moneylife under the pen-name ‘Gurpur’)
The real problem with the sequestration for both politicians and investors is that the cuts will be phased in over time without an immediate impact. No one is really sure what its effect will be. It is doubtful that either party will feel the need to compromise until there is a consequence either from the markets or from the voters
Three months ago as most Americans were getting ready for the annual holiday insanity, the news outlets were adding to the hysteria with threats of a fiscal Armageddon. The fiscal cliff was coming! The fiscal cliff was coming! As of 1 January 2013 taxes for all US taxpayers would rise and government spending would be drastically cut. This would result in an immediate recession. Markets would crash. Corporate and consumer spending would cease. But a funny thing happened. Nothing! Nothing happened.
After a number of dramatic late night telephone calls, all-night meetings and even a rare session on New Year’s Day, a holiday in the US, at the last minute the US Congress got together and passed a Bill that raised taxes on a very small percentage of Americans and reinstated pension charges on everyone else. The spending cuts were delayed for two months until Friday 1st March. Markets seemed to anticipate this and continued to rise throughout December and have been flirting with multi-years highs ever since. What is interesting is that the markets do not seem to have priced in the second part of the fiscal cliff, the cut in government spending known as the sequester.
In contrast to the fiscal cliff, sequestration has been met with a universal yawn. Compared with the disaster of the Italian election, it seems that nothing much has happened. But if you listen to president Obama, disaster is just around the corner. For the last two weeks the White House has been listing the effects of sequestration. These include the loss of nutrition support for 600,000 poor women and children, cascading flight delays, and a hit to the US military readiness as up to 800,000 civilian employees of the military will go without pay for a short period. Still the American public is almost unanimously apathetic. Polls have shown that although more voters blame the Republicans rather than the president, only half the population has a clue that there is something going on. They dislike the way the government is going about the spending cuts, but the cuts themselves are generally popular, unless the cut is to your favourite programme.
Last December, before the fiscal cliff, there were all sorts of businessmen and CEOs lobbying to prevent it. But now most seem to believe that the cuts would do little harm. The fiscal cliff entailed something all businesses hate with a passion: higher taxes. The sequester is something much more benign: cuts in government spending. Even better those cuts phase in gradually over time. So, unlike a tax hike which would affect people immediately, the cuts may or may not be noticeable.
The sequester started as a compromise in the summer of 2011. It was a compromise to insure that the US could continue to borrow money and stand behind its obligations. It was basically a bet by both parties that they would come out with the upper hand at the next election. Sadly the electorate again split down the middle and neither party gained any advantage.
The two aspects of it were unequal though in their repugnance to a particular constituency. The idea was to find a solution to America’s $16 trillion deficit, which is approaching 100% of GDP. The Republicans wanted to solve America’s growing deficit with spending cuts. The Democrats wanted to solve it with higher taxes on the rich. The fiscal cliff contained both cuts and taxes, but the Republicans outmanoeuvred the Democrats. They came up with a deal at the last minute that raised a few taxes on a very small number people earning over $450,000 a year, a very small number of individuals. But they delayed the cuts until 1st March. With the taxes out of the way, the Republicans felt no need to compromise on spending cuts. There are Republicans who dislike the military cuts especially in districts with military installations. For every one of those, there are Democrats who like the idea of taming a bloated military. Still the vast majority of citizens will probably not notice at all. President Obama basically admitted this on Friday. He toned down the scare tactics and said that sequestration would not result in a collapse.
The economic effects of the cuts in government spending are hotly debated. Some Democratic tinged economists feel that the cuts of $85 billion this year and $1.2 trillion over 10 years will result in a loss of almost 1% of GDP. In December the US economy grew at only 0.1% and the forecasts are for not more than 2%. The Republican economists are more benign. They point out that the cuts account for only 2.3% of total spending and that the government should easily be able to cut this amount since government agency budgets have been growing by an average of 17% in the previous five years. Their projections are for an impact on the economy of as little as 0.3% although unemployment could tick up from the present 7.9% to 8%.
This week in his testimony the Federal Reserve chairman, Ben Bernanke promised continued monetary stimulus in the form of QE3. But he admitted that the stimulus would not be sufficient to overcome the effects of the budget cuts. Bernanke’s promise may not be sufficient, because there are rising doubts about the risks of his programme both in Congress and more importantly among his own Committee. In the minutes recently released ‘many’ of the 19 officials who attend the rate-setting Federal Open Market Committee “expressed some concerns about potential costs and risks arising from further asset purchases”.
The sequestration is not the only budget issue. Congress has not been able to pass a budget due to the continuing polarization. To keep the government running, they use a device called “a continuing resolution” that funds programs at prior levels less the sequester cuts. It there is no budget by 27th March, the government shuts down. Finally the debt ceiling ran out in the beginning of February. To avoid the really harsh and immediate economic impact it was extended, but only until May. No doubt these deadlines will be an excuse for more sniping and possible delay, but to go past either deadline has an immediate effect which is probably untenable for either party.
The real problem with the sequestration for both politicians and investors is that the cuts will be phased in over time without an immediate impact. So no one is really sure what its effect will be. It is doubtful that either party will feel the need to compromise until there is a consequence either from the markets or from the voters. Right now neither seems to be interested. So nothing will be done.
What is clear is that the period of unlimited monetary and fiscal stimulus in the US is coming to an end. This will be difficult for both politicians and central bankers. It is far more fun and popular to hand out money than to take it back. The problem for investors though is not the US tightening. The American economy has recently shown signs of resilience especially in the housing market. It appears that the employment situation is getting better, which will change with sequestration. Recent numbers from manufacturers are hopeful. So there will probably not be a US recession, but neither will there be anything but marginal growth.
The problem is that tightening in the US appears to be part of the global tightening. The best thing that can be said about the European numbers is that they are not as bad as they were. The EU remains in recession and the political turmoil in Italy and other countries will not help the situation with the Euro.
China has been floating on a flood of cash from the unleashing of its shadow banking system since last year. This will end. The People’s Bank of China recently announced new regulations aimed at controlling these off balance sheet transactions. The state council has announced further restrictions on real estate. The experiments with real estate taxes will be continued and expanded, which will increase carrying costs for the millions of empty apartments. The real estate issue is so bad that even Rui Chenggang, the patriotic anchor of a prime-time business news programme on China Central Television, the state-run broadcaster, opined that “There is a huge real estate bubble in third and fourth-tier cities in China. Sales of homes have slowed significantly, to the point that supply seriously exceeds demand.” Only Japan seems interested in more free money.
The combination of a more optimistic outlook in all the major economies and loose fiscal and monetary policy has encouraged speculators around the world to increase their risk exposure and look for yield in every possible place. Markets have been driven to all-time highs in many countries. After a recession a certain amount of stimulus is good, but after four years there may be distortions in the global economy that central bankers did not predict, government policy makers did not foresee and investors may find more painful than any effects of the sequestration.
(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and has spoken four languages.)