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Exit tax on graduates is not a good idea
Posted Date: 04 Sep 2007 Resource Type: Articles/Knowledge Sharing Category: General
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Posted By: Niyaz Member Level: Gold
Rating:  Points: 3
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The idea of an exit tax on graduates from India’s highly subsidised institutes like the Indian Institutes of Technology and the Indian Institutes of Management is back on the horizon, with the parliamentary standing committee on human resource development suggesting it.
The logic is simple — the exchequer subsidises these students who then go on to earn substantial sums by working for multinationals abroad and the Indian exchequer gets very little for its investment.
The concept of taxing graduates is not new. The UR Rao Committee, set up in 2003 by the NDA government to look into the workings of the All India Council for Technical Education (AICTE), had suggested that the industry which employees these students should pay a cess.
The cess would help the government recover the cost of subsidising these students. The committee’s report was submitted to the then HRD minister Murli Manohar Joshi. Follow-up action on the committee’s recommendation could not be taken as the NDA government was voted out.
The notion of recovering costs of higher education, especially technical education, seems to have struck a chord with the present United Progressive Alliance government, as well. The subsidy involved is fairly substantial. It costs Rs 1 lakh per year to educate a student in an IIT, but only Rs 32,000 is charged by way of fee. Hence, nearly six months ago, the HRD ministry asked the finance ministry to consider levying an “exit tax” on graduates who leave the country from premier institutions run on massive subsidies.
The finance ministry promptly turned down the proposal, saying it was illogical to have a plethora of taxes. Instead, the subsidy burden could be pruned by raising the fees for students enrolled in premier institutions such as IITs and IIMs.
The story did not end there. The HRD ministry pursued the proposal with a parliamentary panel which, in turn, backed the suggestion to levy an “exit tax”. The group also recommended imposing a “graduate tax” on employers recruiting skilled and trained manpower, saying that these measures could address the funding requirements for higher education.
The proposal to have an exit tax is an old idea, mooted a few years ago by a multilateral funding institution. According to one report, the government could raise at least Rs 4,500-5,000 crore from students going to the US — the amount is less than 1% of the total taxes collected by the Centre.
The differences between the HRD and the finance ministries over the funding of higher education reached a flashpoint during the 2007-08 budget formulation exercise. The finance ministry opposed the 1% cess on all taxes to fund secondary and higher education, saying that such a levy would distort the taxation structure. Besides, a cess by nature was temporary and would have to be withdrawn at some point of time, it had said.
But the finance ministry finally had to yield. After all, the UPA government has made a commitment in its national common minimum programme to raise public spending in education to at least 6% of the GDP in a phased manner.
Higher education funding has been a hotly debated issue not just in India but also in United Kingdom, which looked at the introduction of a graduate tax some years back. Those who favour such an impost argue that higher education is nothing but an investment by students: they give up their current earnings to earn more in the future. These earnings could, therefore, be taxed as their normal income. A graduate tax could specifically capture the extra returns from higher education.
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