Explained: All about the row over GST on research grants

A recent move by the Directorate General of GST Intelligence (DGGI) to haul up educational institutions over the non-payment of taxes on research grants has ruffled many feathers in academia, sparking a debate on the taxability of educational grants.

What is the issue?

It all started when the DGGI, in the second week of August, issued show-cause notices to seven premier Indian institutes over outstanding taxes, totalling around Rs 220 crore, on research grants they received from government and non-government bodies since 2017.

While IIT-Delhi had the largest share of unpaid taxes at Rs 120.3 crore, it was followed by Amrita Viswa Vidyapeetham at Rs 63 crore.

Similarly, unpaid taxes of Chennai-based Anna University’s Centre for Sponsored Research and Consultancy were pegged at Rs 5.4 crore. Shanmugha Arts, Science, Technology and Research Academy and Kalasalingam Academy of Research and Education were supposed to pay Rs 10 crore each. An outstanding amount of Rs 4 crore was pending with Punjab University, while the same for Sree Chitra Tirunal Institute of Medical Sciences and Technology was Rs 7.3 crore.

The educational institute have reportedly been given a month-long window to reply to the show-cause notice.

Similar show-cause notices were also sent to various private and state-run colleges and universities, reports said.

What is the DGGI’s argument?

The DGGI contends that Research and Development services extended by these institutes to government and private bodies in exchange of grants do not qualify for GST exemption. Government bodies like CSIR, and ICMR as well as other private bodies provide grants to these universities.

Institutions usually receive two types of funding – one is not specific to a particular subject and other could be related to a specific area of research or to a product that has commercial application.

A report in the Economic Times, quoting sources, said that the show-cause notices referred to outstanding taxes on the latter.

The government had recently clarified that if the recipient of the grant is not obligated to do anything specific for the donor, then there is no element of service liable to GST.

Why are academics upset? 

Many academics, scientists and funding agencies have criticised the DGGI’s move while several institutes are said to be planning to move court against it.

Experts say while imposing GST on research will reduce the funding amount meant for the research work itself, the taxes will discourage institutes from investing in innovative and risky projects with risk-taking historically being a key ingredient of major breakthroughs.

Several researchers say that while there has been an expansion in the scope of research over the years, the funding has remained the same despite an acceleration in inflation rate.

Others say if at all GST is imposed it should be borne by the entity who grants it.

What is their argument? 

“When researchers receive grant money from the ministry, the government should pay the GST. Researchers would welcome it because they currently pay GST on equipment or components bought with grant funds. If grants were given with GST already paid, they could offset the GST costs they currently bear,” Times of India quoted scientist Ashok Jhunjhunwala, who has chaired government committees and the IIT board, as saying.

Academics say the government should treat research grants akin to subsidies as the funds are not used for personal profit and instead for public good.

Infosys co-founder TV Mohandas Pai, who decried the show-cause notices as “tax terrorism,” has suggested that an expert committee for GST be set up to eliminate “arbitrary action by GST officers” and “reduce tax terrorism”.

“Questions should be referred to this committee, position paper prepared, put out for public comments and after that issued as the official view,” he told TOI.

What are legal experts saying?

Legal experts say grants, per say, do not qualify as goods and services on whose supply a GST is levied.

Advocate K Vaitheeswaran, head of the taxation committee of the Madras Chamber of Commerce and Industry, says a grant is similar to a donation. He told TOI that while GST is imposed on the supply of goods and services, the same should not be imposed on an university receiving a grant as it is not obligated to provide any goods or services in return.

Lawyers at Lakshmikumaran and Sridharan Attorneys, in an article, said that considering that the GST law works on the rule of quid pro quo (something for something), to keep a grant outside the purview of GST, it should be clarified that “the grant is indeed a unilateral payment and does not carry any consideration for the grantor”.

Export, service

Sharing similar insights, Pratik Jain, partner, PwC India, told Economic Times that it should be clarified that whether the research in question was done for “someone or not”.

"...the key aspect here is to see whether research was done 'for' someone or not. In any case, the amount received from overseas donors in foreign currency should qualify as 'export' if it is a 'service' transaction. One can expect the GST council to pick up this issue for deliberation and necessary clarification," he said. Other experts say research grants should not be taxed as there is no certainty that a research will yield results and thus may not result in “saleable goods or services”.

They say the GST should also provide the academic community with a tax relief along the lines of the accelerated tax shield provided by the Income Tax law to research institutions under Section 35(1)(ii).

In several countries, legislations ensure that grants and subsidies are non-taxable. For instance, in New Zealand, Section CX 47 of the Income Tax Act considers grants and subsidy payments are non-taxable while Section DF 1 treats business expenses funded by grant or subsidy payments as non-deductible.

How has the govt responded to the row?

Amid the palpable discontentment among the academic community, the Union Ministry of Education has reportedly spoken to the Ministry of Finance on the issue.

Many academics hope the issue will be discussed at the upcoming meeting of the GST council on September 9.