Grants are largely understood to be the financial assistance provided to an organisation voluntarily and without any obligation to be repaid, and their provision is unilateral such as:
a) Grants for research and development
b) Grants to promote fields of arts, commerce, science, research, education, sports, charity, social welfare, religion, environment protection, or other similar objectives.
In India, Goods and Service Tax (GST) is levied on the “supply” of goods or services for consideration in furtherance of a business purpose. Therefore, the definition of supply is broad enough to include a multitude of activities under it, subject to the same being provided in the course or furtherance of a business.
This article aims to provide insight into the grants provided to organisations and if it can be considered for GST applicability vis-à-vis advance rulings and clarifications issued under GST laws.
Applicability of GST on Grants for Research & Development
Education and research institutes typically receive grants from businesses or government entities to support research and development. These grants may aim to create products for commercial purposes or philanthropic and charitable goals. It is important to understand the nature of the transaction to determine whether the grant can be considered a form of compensation and whether GST applies.
GST does not apply to grants for research and development if the following conditions are satisfied:
a) The granter is not receiving anything in return,
b) The granter does not directly or indirectly benefit from the grant, and
c) The grants are for philanthropic and charitable purposes.
However, grants provided for research and development that benefit the granter commercially are subject to GST.
For example-
ABC Private Limited provides a grant to a research institute for research and development of a specified product. The reports and data from the research will be used by the company to develop their final product. In this case, the grant is taken into consideration, and GST will be applicable on the transaction.
Conversely, if ABC Private Limited provides a grant to a research institute for research and development under a specified program or scheme intended for the public at large for philanthropic and charitable purposes, the grant is not considered for business purposes, and GST will not be applicable to the transaction.Note: On the application of the GST, the recipient of the grant is obligated to obtain GST registration and charge GST from the granter. The recipient is also responsible for monthly compliance and the payment of GST to the relevant Government department.
Applicability of GST on Grants to Promote Fields of Arts, Commerce, Science, Research, Education
The applicability of GST on grants provided to promote fields such as arts, commerce, science, research, and education depends on the nature of the transaction and the intended use of the grant. The grants under the category can be provided for commercial purposes as well as philanthropic and charitable purposes.
The Grants provided in the field of arts, commerce, science, research, and education by the Grantor with an objective to obtain commercial benefit is subject to the GST. However, any grant provided under the said field with the sole intention of philanthropic and charitable purposes will not be considered as business and thereby non- taxable under GST.
The difficulty arises in assessing transactions which are seemingly philanthropic and charitable in nature, however, may also be subject to benefit or gain that the Grantor may receive as a consequence of such grant. Some of the situations are as below:
1. Grant provided by a company for the benefit of the public, however, grantee provides the monthly report to the grantor for accountability.
Companies provide grants for the benefit of the public in fields such as research and development, arts, commerce, science, and education. If the grantee uses the grant to produce data or reports for the granter's commercial activities, this is considered as business and is taxable under GST.
However, if the grantee provides data or reports to the granter solely for accountability purposes, this does not qualify as business and is not taxable under GST. Therefore, it is crucial for both the grantee and the granter to have proper documentation outlining the utilization of funds and the reporting mechanism to avoid disputes with the GST department.
2. Grant provided by a company for the benefit of the society in health and education & in return the grantee provides advertisement or promotion of their name in publication.
Transactions have come under the radar of GST authorities which have seemingly sought tax exemptions being in the nature of a donation or a philanthropic grant, however, there is a material benefit in the form and nature of publicity and marketing for the grantor, in response to provision of the grant.
When a recipient organization or institution publicly acknowledges a grant received, and this acknowledgment serves as an advertisement or promotion of the donor’s business or interests, it qualifies as a taxable supply. The material benefit derived from such acknowledgment amounts to consideration for the transaction.
In this regard, the Ministry of Finance, Department of Revenue issued a clarification by way of
circular no. 116/35/2019-GST viz. the levy of GST on the service of display of name or placing name plates of the donor in the premises of charitable organisations receiving donations or gifts from individual donors.
It was clarified that such display of donor’s name or acknowledgement which is expression of gratitude and public recognition of donor’s act of philanthropy will not qualify as a supply of service for a consideration and there is no GST liability on such grants/donations.
However, if such display is tantamount to an advertisement or promotion of their business in any manner whatsoever, it would qualify as a valid consideration and GST liability will be attracted on such transactions.
Therefore, the purpose of the grant must be philanthropic and not towards any commercial gain such as advertisement and publication.
3. Subsidy received from the Central Government, or the State Government
Subsidies received from the Central Government or State Government are excluded from the definition of consideration. Therefore, any such consideration provided by the Government for the provision of supply in furtherance of a business purpose will not be subject to taxation under GST.
By way of example, tasks and services undertaken for charitable activities which are beneficial to the public have been construed to be like grants or subsidies and therefore will not fall within the purview of taxation in case such grant has been received from the Government for undertaking such activities. Any amount thus received is not taken into consideration, so long as the same has been received from the Central or State Government.
The Maharashtra Appellate Authority for Advance Ruling clarified its position in the case of
M/s Jayashankar Gramin and Adivasi Vikas Sanstha. In its order dated 21st September 2021, the Authority set aside the advance ruling made by the Maharashtra Authority for Advance Ruling (dated 10.11.2021). The clarification stated that the amount received from the government in this case was akin to a subsidy, and therefore, there is no occurrence of a ‘supply’ as per the provisions of the law.
Conclusion
In broad terms, GST applies to transactions involving the supply of goods or services for consideration. Consequently, any grant received by a charitable trust that entails the provision of goods or services for a business purpose may trigger GST implications on the received amount. To determine whether a grant qualifies for exemption under GST laws, we must assess whether the transaction constitutes a ‘supply’ and whether it provides the grantor with a material benefit in exchange for the grant.
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