Press Reports indicate that premier institutions such as IIT Delhi; Anna University; Punjab University; Sastra University and few other academic institutions have received show cause notices from the DGGI. There are also Press Reports stating that the Education Ministry is not too happy with the Notices issued seeking GST on Research Grants.
The dispute has arisen on account of the DGGI taking a position that Universities and Institutions should pay GST on the research grants that they received from Government; Quasi-Government Bodies; Funds; Industry; Donors and philanthropists.
Despite the fact that there are internal instructions from the Central Board of Indirect Taxes and Customs that DGGI should not issue notices which involve interpretation of law without the clearance from the Board, the salvo of notices to academic institutions has caused significant stress amongst the academia.
Levy of GST is on supply of goods or services for consideration. In simple terms a person is required to supply goods or services in lieu of the other person making a payment by way of consideration. Further, the activity must be in the course or furtherance of business.
When a research grant is given by Government or corporate philanthropy or philanthropists or international agencies, or Alumini of any institution / university, it is for the purpose of carrying out research; fostering innovation; explore new technology; carry out studies that ultimately benefit the society or public at large. The university or the institution that receives the grants does not supply any goods or service to the donor. In order to sustain the levy of GST, the consideration must be ‘in connection with’ the supply and the supply must also be ‘for’ the consideration.
An institution or University carryout research is not carrying on business. When ‘consideration’ is missing and when ‘supply of goods or services’ is also missing, there can be no GST.
No ‘consideration’
In so far as universities are concerned, when they receive a research grant there is no corresponding requirement to supply goods or services to the person giving the grant. Similarly, the person giving the grant does not procure any goods or services from the University. Thus, the grant received does not constitute ‘consideration’. In such a scenario it is unfortunate that a few institutions have been slapped with show cause notices considering such grants as taxable. It is also not clear as to how only a select set of universities and institutions are being subject to these notices.
Grants given for open ended research does not tantamount to consideration as it is a receipt in the nature of grant simpliciter without a quid pro co of supply of goods or services. Generally, these grants are used for funding research projects; purchase of capital assets; equipments; purchase of materials and consumables; training; payment of stipend; etc. and the end result could be a report or a study or a new innovation or a technological breakthrough or creation of new knowledge. The donor does not have any ownership rights over the research findings.
Not ‘income’
Institutions account these grants as funds in their balance sheet and it is not taken as income. There are conditions with reference to utilization and reporting. There could be some rare cases where the research could result in an outcome such as new technology or patent. Even assuming that as per the terms of the grants future IPR would be owned jointly, at best it is a joint ownership of IPR and there is no existence of IPR at the time of grant. If the IPR is exploited and there is some degree of licencing which results in royalty then that royalty would be liable to GST and there is no quarrel on that aspect.
In a GST case, the Bombay High Court in the case of Bai Mamubai Trust Vs. Suchitra has held that enforceable reciprocal obligations are essential to a supply and that the supply doctrine does not contemplate or encompass a wrongful unilateral act or any resulting payment of damages.
Indian GST has borrowed extensively from UK VAT, EU VAT, Australia GST, etc. Interestingly, in UK, the European Court of Justice (ECJ) in the case of R.J. Tolsma v. Inspecteur der Omzetbelasting Leeuwarden held that a supply of services is effected for consideration only when the provider of the service and the recipient enter into a legal relationship wherein the provider carries out a service and receives remuneration in return for the said service - which was absent in the public performance on the highway owing to lack of intention.
The grant by its very nature is meant for covering the expenditure incurred in carrying out research and the report or the benefit of the research is for public at large and not for consumption by the person making the payment. Even if the research or the benefit of the research exclusively belongs to the University, there is no change with reference to the legal concept of grant not being consideration. When the payment does not have the character of consideration and there are no reciprocal obligations, it cannot be said that there is a supply for the purpose of levy of GST.
Universities and academic institutions play a significant role in ushering new research and innovation apart from development of new technologies. These institutes depend upon various donors who provide research grants and any attempt to impose GST on such grants would throttle innovation and research. It is hoped that the exercise is nipped at the bud through appropriate Circulars or Directions so that the blossoming of research and innovation is not affected.
The writer is an advocate and tax consultant