By Anshul Mathur, Vinayak Kohli and Sahil Aggarwal
The recent wave of Show Cause Notices (“SCNs”) issued by the Directorate General of Goods and Services Tax Intelligence (“DGGI”) to several of the nation’s most prestigious educational institutions on research grants received, has sent shock waves in this sector. This is particularly concerning because these sectors, which may otherwise be availing GST exemptions, would be caught in the tax net if such grants are determined to be taxable. The potential taxability of such grants could also adversely impact the funds allocated to these institutions.
From a legal standpoint, the conundrum surrounding the taxation of grants and donations received by educational or charitable institutions has been a contentious issue even before the advent of the GST regime. Under the erstwhile Service Tax regime, an activity was taxable only when it was performed in exchange for a ‘consideration’. In other words, grants given for research where the researcher is under no obligation to carry out a particular research would not be a consideration for such research. However, the existence of a counter-obligation on the researcher, such as the grantor’s acquisition of intellectual property rights over the research conducted was sufficient to qualify the grant as a ‘consideration’ for provision of a taxable service. Conversely, general research grants, which did not impose any reciprocal obligations beyond proper usage of funds and furnishing of accounts, were not treated as ‘consideration’. This understanding has been continued under the GST regime, where the core issue remains whether ‘grants’ or ‘donations’ received qualify as a ‘consideration’ under Section 2(31) of the Central Goods and Services Tax Act, 2017, for a corresponding ‘supply of service.’ Accordingly, the existence of a reciprocal obligation or, in other words, a quid pro quo — remains relevant even in the GST regime.
There may well be other situations, like where a grantor provides a research grant to an educational institution with the stipulation that any publications arising from the funded research must acknowledge the grantor. Whether such obligation constitute a quid pro quo is relevant to determine. In situations where it partakes the nature of promotion of the grantor, the philanthropic character of the grant is arguably diminished, and the grant may qualify as a consideration for a supply of service. Notably, in context of donations to a charitable organization, the Ministry of Finance has clarified that where donations or gifts retain their philanthropic nature i.e., they confer no commercial benefit or promotional advantage upon the donor, GST is not leviable. While this clarification has provided some relief, the underlying controversies remain unresolved.
Historically, courts have grappled with this issue, delineating various factors to determine whether specific grants or donations to educational and charitable institutions constitute a consideration for taxable services or not. For instance, where voluntary donations were made to a club for a building fund, it was observed that there was no nexus between the donations and the service rendered, and therefore, such voluntary donations would not be taxable. Alternatively, where donations were collected for entry into the yoga camps, it was held that such donations were a consideration for the provision of service taxable under the category of ‘health and fitness services’, and therefore the same were held to be taxable. Thus, the provision of such grants or donations may or may not constitute as a ‘consideration,’ depending on their nexus to a reciprocal obligation. Hence, the taxability of such grants or donations is contingent on the nuances of the particular facts involved in each case.
In the wake of SCNs issued to prominent educational institutions, the Ministry of Education has now approached the Ministry of Finance seeking a resolution to this ongoing controversy. However, till the time an outcome is reached, the determination of the taxability of research grants or donations will remain subject to debate. It is imperative that the specific facts of each case be closely examined for the presence of any reciprocal obligations or quid pro quo, by educational and charitable institutions receiving such funding.
(Anshul Mathur is the Executive Partner; Vinayak Kohli is the Principal Associate and Sahil Aggarwal is an Associate at Lakshmikumaran & Sridharan Attorneys)
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From: financialexpress
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