FEBRUARY 07, 2024

By Rohini Mukherjee, Divya Bhardwaj and Aishwarya Vardhan

THE taxability of grants has been a bone of contention between the taxpayers and the department. While a clarification has been issued on this issue, there is no litmus test providing a definitive answer regarding the taxability of a grant.

The term ‘grant' carries a connotation of something which is given unilaterally and voluntarily. It may be given with or without an intention to undertake a specific activity. To quote a few examples, grants can be in the form of research grants given to educational institutions, grants given to non-profit organizations to fund their programs and initiatives, art and cultural grants given to promote artistic expression, etc.

Grants, especially those in the nature of philanthropic undertakings and charitable purposes, which are ostensibly not conferring any benefit to the recipient, are surrounded by the question whether these would attract taxability, despite being a unilateral payment.

Further, given the voluntary and unilateral nature of a grant, there exists ambiguity whether the provision of a grant qualifies to be a taxable supply under the scheme of the GST law as pertinently, to qualify as a supply, it is essential that a good or service is provided for consideration. 1

Before delving into the nitty-gritties of this issue under the GST regime it may be appreciated that in the erstwhile tax regime, i.e., the Service Tax regime, it has been time and again held that there needs to be a direct link between the grant and the service provided, in order for a grant or a voluntary payment to be held to be leviable to service tax. 2 Further, it has been pointed out that the concept of ‘activity for a consideration' involves an element of contractual relationship wherein the person doing an activity does so at the desire of the person for whom the activity is done in exchange for a consideration. 3

As far as the GST law is concerned, the term ‘consideration' has been inclusively defined under the Act. This term is derived from the Latin phrase ‘ quid pro quo ', which means ‘something for something'. Therefore, if any person is undertaking any activity, then such activity will qualify to be a supply of service only if the person undertaking the activity receives some consideration for the same.

At this juncture, a question arises as to whether the receipt of the grant amount can be said to be a consideration, wherein the grantee is providing services to the grantor, on the utilization of the grant funds. Here, it needs to be examined on case-to-case basis, whether the provision of the grant amount, in a particular arrangement, has its strings attached to the service provided and the consideration paid.

It may be noted that internationally, it has been recognized that if the payment is made either as a condition of, or in expectation of services rendered by the grantee, then the grant is indeed in the nature of consideration in return for a supply.

For illustrative purposes, let us say that an entity undertakes a research project at the behest of a grantor, aimed towards benefiting the health and well-being of the public. As a corollary to such research, certain data and dissertation are developed and the ownership of this research material is given to the grantor. In such a case, such a transaction may meet with scrutiny, and it will have to be seen whether the research material can be said to be a consideration for the granter.

Further, in order to gauge whether there exists a direct nexus between the service provided and the grant fund received, certain indicative non-conclusive tests that may be used are 4:

A. Does the grantor receive anything in return for the funding?

B. If the grantor does not benefit, does a third-party benefit instead?

C. Are any conditions attached to the funding, which go beyond the requirement to account for the funds?

It is, therefore, crucial to travel beyond the nomenclature of a term to the very essence of the transaction.

It is worth noting that irrespective of whether the amount is received in the name of grant or donation or charity, it must be meticulously seen whether there is an element of quid pro quo in the particular arrangement. Interestingly, such a reciprocal benefit need not be explicit.

For instance, let us understand a scenario where a grantee is receiving the grant to undertake certain charitable activities.

These activities are being undertaken for a complete third-party, who is receiving the benefit of such initiative. The grantee is only required to submit timely reports to the grantor, to ensure accountability. However, it is mutually agreed between the grantor and the grantee that the grantee will post regular updates of the charitable activity on social media and acknowledge the support of the grantor with respect to all such publications.

This, very understanding between the parties can be said to provide promotional benefits to the grantor, thereby establishing a quid pro quo in this case. In this regard, it is noteworthy that vide a Circular issued in November 2019, the Revenue Department has clarified that when the name of the donor is displayed in the recipient institution premises, in such a manner, which can be said to be an expression of gratitude and public recognition of donor's act of philanthropy and is not aimed at giving any publicity to the donor of his business, then it can be said that there is no supply of service for a consideration. 5

Though the above clarification was a welcome measure, the same needs to be applied carefully to the factual matrix of a particular arrangement.

In summation, for a provision of a grant to be outside the purview of GST, it is essential that the grant is indeed a unilateral payment and does not carry any consideration for the grantor. It is, therefore, crucial to delve into the very essence of the transaction in order to navigate this complex maze of grants.

[The authors are Partner, Principal Associate and Associate, respectively, in the Indirect Tax Advisory practice at Lakshmikumaran & Sridharan Attorneys, New Delhi. The views expressed are strictly personal.]

1 Section 7, CGST Act, 2017.

2 Jaisal Club Ltd. v. Commr, Japir , [2017 (4) G.S.T.L. 357 (Tri. - Del.)] - 2017-TIOL-1828-CESTAT-DEL.

3 Taxation of Services: An Education Guide, Central Board of Excise and Customs [2012].

4 Trustees of the Bowthorpe Community Trust, LON/94/1276 A, No. 12978 in Simon's Weekly Tax Intelligence, 13 April 1995, at 649; Hillingdon Legal Resource Centre (LON/90/12Y), Wolverhampton Citizens Advice Bureau, MAN/96/1145; Hope in the Community (supra).

5 Circular No. 116/35/2019-GST dated 11 October 2019.