Taxing elite schools and hospitals

Updated November 18, 2019

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Jan 2018 data shared by Sindh Revenue Board / Infographic by Shahab Nafees
Jan 2018 data shared by Sindh Revenue Board / Infographic by Shahab Nafees

FEDERAL and provincial tax authorities are digging deeper into the financials of money-minting private schools and hospitals, looking into creative techniques applied by some to hide their real financial worth.

The dominant cash-based transactions in health and education markets pose challenges to an accurate financial assessment and monitoring of the money trail in these establishments.

It was learnt that both tiers of the government in Pakistan are currently in the process of amending rules and regulations to ensure better disclosures and tax compliance in these sectors.

The representatives of private schools were not readily accessible for comments.

Private hospitals do not have a national body to represent them. However, Faisal Malik, the secretary of Private Hospital Association of Gujranwala, articulated their position, and opposed taxing hospitals on the ground that it would burden patients.

President of the Pakistan Medical Association Dr Ikram Ahmed Tunio, however, was in favour of taxing the elitist institutions. “I see no harm in taxing schools and hospitals that are beyond the reach of the common man and exclusively serving the ultra-rich,” he said over the phone from Larkana.

Hamid Ateeq Sarwar, Member Policy of the Federal Board of Revenue, told Dawn that lucrative private health and education sectors have persistently been on the radar of tax authorities.

“In the current Finance Act, we have introduced a 5 per cent withholding tax on school fees exceeding Rs200,000 per annum (or Rs16,666 per month) besides the corporate tax levied on all entities registered as companies,” he said.

The applicable corporate income tax rate for health and education companies is 29pc, which is the same for other sectors, he added. “I don’t have numbers at the top of my head, but I can tell you that the revenue mobilisation from these sectors is sizeable.”

According to Section 236(I) of the Finance Act 2019, every educational institution is liable to collect advance income tax at the rate of 5pc on fees exceeding Rs200,000 a year.

Talking about the stellar commercial success of several private clinics, labs, hospitals, schools, colleges and universities in Pakistan over the past three decades, Mr Sarwar disclosed that many education and health organisations are registered in the Large Taxpayers’ Units in Karachi and Lahore.

In Karachi alone, there are several dozen schools with a collective enrolment of at least 100,000 students that charge a monthly fee of Rs10,000 or more

He said that in the FBR they are treated as under-tapped sectors, and efforts are afoot to amend rules for improving transparency and tax compliance. “We know that some commercial companies in health and education sectors misstate their status as trusts or charities to avail tax breaks, but we will not let them befool the state and are evolving systems leveraging technology to make tax avoidance difficult.”

Another member of the FBR’s hierarchy mentioned legal battles where, in some cases, even foreign embassies are involved to shield private companies from the tax net.

When asked to comment, Mr Hamid said: “We do not go about advertising the tax affairs because of confidentiality clauses, but I can tell you that the exercise is near completion to issue the sector-wise tax directory to apply social pressure by naming and shaming tax dodgers and to promote the culture of tax compliance.”

In the Finance Act of 2019-20, the Punjab Revenue Authority (PRA) has also introduced a 5pc service tax on doctors’ consultation fee exceeding Rs1,500 per patient and on hospitals bills where per-night room charges exceed Rs6,000.

“Along with revenue collection, the documentation of the economy is a primary target of sales tax regime,” PRA Chairman Zainul Abidin said in an email response. “The Punjab government kept the sales tax at minimal 5pc on doctors’ consultation and hospitalisation charging more than the benchmark as opposed to the standard rate of 16pc to ease the burden on the sick and ensured that the cost of health services availed by lower-income groups remains unaffected.”

He said hospitals resist the service tax mainly because they are reluctant to get their transactions documented. “The ultimate burden of payment is on the end-consumer and not the hospital. Still, they are opposed to the idea,” he said.

High-placed sources at the Sindh Board of Revenue confirmed to Dawn that the proposal to introduce the service tax on the elite private health and education establishments has been forwarded several times over the past five years but it has been shot down by the cabinet on the pretext of a public backlash.

On one occasion, the proposal made it to the finance bill, but it was dropped by the provincial assembly.

“It is ironical to spare ultra-rich segments of taxes while the struggling middle and poor classes are asked to share financial burden and endure the pain of stabilisation,” commented an observer on the issue.

In Pakistan, education and health barons managing schools, clinics, labs, etc. have multiplied their wealth several times and acquired sizeable land assets in posh localities over the past three decades. Early entrants in these highly lucrative fields have morphed into big business groups.

Many health and education companies have expanded horizontally and vertically. Brands have been evolved and school and lab chains have sprung up across the country. Some popular brands in the education sector have developed franchises to tap into the broader middle-class market.

Several groups have ventured into other sectors on the strength of their financial muscle gained by capitalising on health and education demand of the elite.

Data on labs and hospitals in the city was not available. However, according to documents shared by the Sindh Revenue Board, in Karachi alone there are several dozen schools, with collective enrolment of at least 100,000 students, that charge Rs10,000 or more per month per child.

The most expensive of them, The American School Karachi, charges a monthly fee of $1,166 (nearly Rs182,000 according to the current exchange rate).

Paying 10.7 times the minimum wage in school fee for one child by parents who choose and afford The American School also sheds some light on the scale of income disparity in the country.

Published in Dawn, The Business and Finance Weekly, November 18th, 2019