VAT on education: It’s not on

When the World Bank withdrew its proposed funding of $1.2 billion for the construction of Padma Bridge alleging 'corruption conspiracy' at the high levels of government, the latter responded by promising people that the bridge would be built with internal resources.

Some journalists asked me at that time if this was possible. It apparently did not please them when I said we could build not one but several Padma Bridges with our own resources.

But there was a trade-off: if we did so, other projects would have to be shelved and more resources raised in taxes. There was also a strong likelihood that 'corruption conspiracy' could turn into actual corruption, and consequently there could be cost overrun.

According to a recent newspaper report the initial cost estimate of Padma Bridge at about Tk. 100 billion has been revised upward to nearly Tk. 290 billion. It is safe to assume that it will rise further, perhaps in excess of Tk. 500 billion by the time it is completed.

This is more than twice the estimate of the World Bank.

This type of cost overruns and outright defalcation of money from state-owned banks have put great pressure on the exchequer, which is presided over by the Finance Minister. Unable to contain runaway costs, which would hit at the power base of the government, he has been forced to attempt to increase revenue.

Many charges and fees have been reportedly increased many fold. The minister is trying his best to widen the tax net for both income tax and VAT. It looks like he widened it a little too much when he included the private universities and got entangled in it.

Although nominally non-profit organisations, the private universities are known to be money-making machines capitalising on the extreme keenness of young people and their parents for higher and better education. The minister probably wanted a share of the creamy private university pie.

But since these are non-profit organisations, they pay a much lower tax from their profit or income than what is paid by business enterprises. So the minister hit upon the idea of imposing a VAT on their student fees. What he did not anticipate was the backlash from the student community as well as the powerful owners of these universities, many of whom have very strong ties with the ruling party.

It was swift in coming.

Predictably the owners strongly criticised the imposition of the VAT. The students, indignant on such a blatant imposition, poured out on the streets virtually choking much of the traffic in Dhaka. What happened next revealed the extent to which the minister was out of touch with reality.

First, he asked why students who spent Tk. 1000 a day should not be able to pay an additional Tk. 75 in VAT.

Then he said something that is not expected of a Finance Minister who often wears the tag of an 'economist'. He said that the VAT would be collected from the universities; the students would not have to pay the VAT. Most surprisingly he let the Prime Minister assert the same in parliament.

One of the lessons of introductory public economics is that any tax on commodities (whether goods or services) will be shifted to the final consumers either wholly or partially. VAT, as it is collected in the country, is a tax on commodities.

When the Minister said that the VAT on private universities will be collected from the universities, he perhaps meant it literally. VAT is indeed paid (or collected) by the producers or sellers. What he completely missed is that the producers or sellers are not passive takers of the tax burden; they simply pass it on to the buyers by raising their output prices.

The students knew it and they were not fooled by the assurances of the Prime Minister, the Finance Minister, or the owners that the universities would pay the tax.

They continued with their agitation that brought Dhaka to a standstill. The agitation also spread to other cities including Chittagong. The government is already at loggerheads with the teachers of public universities over the new pay scale. It is also bracing for protests of college and school teachers and lower order government employees over the same issue.

The massive show of force by the students spooked the government to retreat; it withdrew its decision to impose VAT on private universities only a few days after the Finance Minister had boldly asserted that the tax would not be withdrawn.

The government had its nose rubbed in the dirt over the VAT affair. It could have been avoided. Instead, the Finance Minister stoked the flames. By design or failure, the government has encouraged the development of a dual education system: one supported by the government and the other self-funded (private).

In the higher education sector, supposedly more than half the students are now in private institutions. While the students at the public universities receive education virtually free (and a large number also get accommodation virtually free) the private university students are forced to pay an enormous amount of money for education. Not only that, the government does not spend any resources on these students.

The Finance Minister heartlessly commented that if they could pay the fees, they should also pay additional amount in tax to the government. The comment betrays the mindset of a person surrounded by people of wealth and power, who can meet any cost by abusing their privileged positions. The minister has embarrassed the government, and if he continues, he is likely to do so again in the future. Perhaps he should pay heed to the advice of the Federation of the public university teachers associations.

If the government was really keen to tax the high profit of the private universities and colleges, it could have had broad based popular support since neither the efficiency nor the equity principle of taxation would be violated. These institutions can hardly be called non-profit just because they do not distribute profit as dividends. There are many ways to kill a cat. An investigative audit should bring out any oddities.

A non-profit organisation has a connotation of being a charity. It is not very clear why private universities or medical colleges should be regarded as non-profit organisations. Many other institutions, such as private schools, clinics and hospitals etc. also provide essential services to the public even though they are not non-profit organisations.

The government could examine the legal feasibility of either changing their registration from non-profit organisations to some taxable entity or amend the non-profit organisation law to permit it to levy higher taxes or contributions on them.

The University Grants Commission could limit any extravagant remuneration or fees the owners charge to universities for whatever services they provide. There would be then less public concern about the functioning of the private educational institutions regardless of whatever profit they may earn.

The owners may also favour such a change as they could set any fees that the market would bear and appropriate the profits.

Dr. M. A. Taslim is a Professor at the Department of Economics of Dhaka University.