By: Ram Chander Sankhla, Advocate | Former Chief Commissioner, GST & Customs| Managing Partner, Sankhla Law associates.

Author can be reached at www.rrsla.com

  1. “MERI CHATRI KE NICHE AAJA” i.e. “Come under my umbrella” is a famous country side song in India. It seems to be turn of Directorate General of GST Intelligence (DGGI) to dance and sing to the tune of this local song by bringing everyone under their Umbrella. First, it was Infosys, followed by Foreign Airlines and now Research and Development Institutes i.e. IITs, Universities etc. And, in turn IITs/Universities and other Research Institutes are feeling the ferocity of DGGI’s dancing moves.
  2. So, there have been spate of Show Cause Notices (SCN) to such research and development institutes running into around 250 Crores. News is also abuzz that these kinds of actions are nothing but regressive thinking bereft of any ethical or moral values. To understand this, one needs to dive deep into the controversy at hand.

MORALITY v. LEGALITY:

  1. Let us take case of Indian Institute of Technology (IIT), Delhi. It was established in 1961 as The College of Engineering & Technology. It was set up under an act of Parliament declaring it an Institution of National Importance under the “Institute of Technology (Amendment) Act 1963” and was renamed “Indian Institute of Technology Delhi”. It lays a strong emphasis on the sponsored research and industrial interaction. The Industrial Research & Development (IRD) Unit was specifically set up in the Institute to provide specialized support for the operation of Sponsored Research Projects, Consultancy Jobs and other related R&D activities. Over the years, the institute has set up many modern laboratories and is continuously supporting infrastructure through these projects. There are similar universities and R&D and Sponsored Research Institutes pan India. Some of these are set up under an Act of Parliament/State Legislatures.
  2. IITs, Universities and similar research institutes undertake sponsored projects of Central Govt., State Govt, UT Govt. and Govt. entities like CSIR, DRDO, SERB etc. and Sponsored Projects of Private Entities /PSUs.
  3. The Sponsored projects are research projects funded by various entities including private persons and govt. entities as well as Central and State Governments. The IPRs and royalties, if any, originating out of the said Research and Experimental Development Services, are shared by IITs/universities and similar research institutes, and the person who made the grant in-aid as per MOU between them. GST is being paid on the sponsored Projects of PSUs/Private entities @ 18% whereas GST is not paid on the Sponsored Projects of Central Govt., State Govt., UT Govt and Govt. entities like CSIR, SERB etc.
  4. These Institutes/Universities receive GRANTS from government / non-government bodies for conduct of research and development activities. It is the belief of these Institutes/Universities that funds received from various Government and government entities like DRDO, SERB, ICMR etc. are actually SUBSIDY from the government, sometimes routed through these government entities, hence outside CONSIDERATION and not taxable under GST. However, the belief of DGGI is different that these are NOT SUBSIDY, hence such financial assistance/grant for research and development activities are liable for taxation that is, GST, which these institutions are not paying.
  5. There is no doubt that these sponsored projects are for the benefit of nation and public at large. Some of these sponsored projects relate to renewable energy sector and other important economic sector of the nation. It is also a fact that IIT Delhi was established at a time when not much of the technical institutions of such importance and value was existing in our country. IITs, Universities and Institutions are doing research and working in the interest of Nation. Then the question normally asked, whenever such kind of demand SCNs are issued, is, if such kind of actions are ethical, moral or progressive. The concerned agencies run the risk of being termed as regressive and unethical. However, the questions are not whether these are ethical, moral or regressive actions but legal.

IS IT ONLY AN INTERPRETATIONAL ISSUE:

  1. Is it than nothing but an interpretational issue between subsidy and grants. Because if it is subsidy, then it will not form part of consideration, hence, outside the ambit of GST law. But if it is other than subsidy, that is, grants or donations then it will be a consideration against supply of services in the form of taking research and development activities on behalf of recipient of services and liable to GST subject to any exemption, if available.
  2. On the basis of Wikipedia, Investopedia and AI Chat bot analysis, following emerges as far as difference between grants and subsidies are concerned:

“Grants and subsidies are similar in that they both involve financial support, but they have distinct differences:

Purpose:

Grant: A grant is a sum of money given for a specific purpose, such as research, education, or development projects. It usually does not need to be repaid.

Subsidy: A subsidy is financial assistance provided to support or promote certain sectors or activities, like agriculture, renewable energy, or public transportation. It can come in various forms, such as direct payments, tax breaks, or reduced prices.

Eligibility and Process:

Grant: Grants are often awarded based on a competitive process and specific eligibility criteria. They are typically provided by government agencies, foundations, or other organizations.

Subsidy: Subsidies are generally aimed at encouraging specific behaviours or activities and may be more broadly available to businesses or individuals meeting certain criteria.

Flexibility and Use:

Grant: Grants are usually designated for a particular project or purpose and must be used accordingly.

Subsidy: Subsidies may offer more flexibility in how the funds are used, often to offset operating costs or stimulate investment.

In summary, while both grants and subsidies provide financial support, grants are typically for specific projects and do not need to be repaid, whereas subsidies are broader financial aids aimed at promoting certain activities or sectors.”

  1. It is nobody’s case that grants are not for specific projects. These are meant for specific purposes without any option to divert/use the funds to other activities of IITs /universities etc.
  2. Thus, the conclusion is that these financial assistances are anything but subsidy. Even, the IITs, universities and other research institutes are treating them as grants. On top of it, the IPRs and royalties, if any, originating out of the said Research and Experimental Development Services, are shared by IITs/universities and similar research institutes, and the government/government entities/private person, making the grant in-aid as per MOU between them. If that be so, it will be consideration. Still, it needs to be seen which Service Accounting Code (SAC), these will fall/classified into, what will be value/rate of taxation and if any exemption is available?
  3. The provisions of Central goods and Service Tax Act, 2017 (in short CGST Act) and State goods and Service Tax Act, 2017, (in short SGST Act) are pari-materia except certain provisions. Likewise, the provisions of Central goods and Service Tax Rules, 2017 (in short CGST rules) and State Goods and Service Tax Rules, 2017, (in short SGST Rules) are pari-materia except certain provisions. Hence, unless specific reference is made, any reference to any provision of SGST Act or Rules shall include and mean reference to corresponding provisions of CGST Act or Rules, and vice-versa, as the case may be.
  4. The GST is levied on supply of any goods or services as per Section 9 of CGST Act. Further scope of supply has been defined under Section 7 of CGST Act as including all forms of supply of goods or services, or both such as sale, transfer, barter, etc. in the course or furtherance of business and to be made for a consideration. It is important to reproduce relevant sections to understand these concepts.

“Section 7: Scope of Supply

(1) For the purposes of this Act, the expression “supply” includes,

(a)    all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business”

Section 2(31):  “consideration” in relation to the supply of goods or services or both includes”

(a)   any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;

(b)   “the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government:

Provided ……….”

  1. Thus, to be SUPPLY under GST law and taxable, it should be made against CONSIDERATION for the furtherance of BUSINESS. The phrase consideration DOES NOT INCLUDE ANY SUBSIDY GIVEN BY THE CENTRAL GOVERNMENT OR STATE GOVERNMENT. In other words, if any supply/service is provided against the consideration received as subsidy from the central government or a state government, it will not tantamount to supply under GST, hence not taxable.

ARE IITs/UNIVERSITIES RUNNING BUSINESSES:

  1. To attract GST, the activities or supply must also fall under the definition of business. Can it be said that they are conducting businesses for their own benefit or for commercial considerations. To answer this, one needs to look into the definition of business as per CGST Act,

“Section 2(17):- “business” includes

 (a) any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit;

(b) any activity or transaction in connection with or incidental or ancillary to sub-clause (a);

(c) any activity or transaction in the nature of sub-clause (a), whether or not there is volume, frequency, continuity or regularity of such transaction;

(i) any activity or transaction undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities”

  1. So, an inclusive definition, so vast to include almost everything in the universe, and further supplemented by words like any other similar activities, whether or not there is volume, frequency, continuity or regularity of such transaction. It also takes into its fold any activity or transaction undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities. For GST purpose, all these institutes are thus engaged in businesses of supplying services against consideration.

Notification 11/2017 CT (Rate) dated 28.06.20217:

  1. Since research is not goods and it is nowhere mentioned as neither a supply of goods nor services, it is a service. The explanatory notes to the scheme of classification of services show as,

 

  • Research and development services

99811   Research and experimental development services in natural sciences and engineering

998112   Research and experimental development services in engineering and technology

  1. Notification 11/2017 CT (Rate) dated 28.06.20217 provides for Central Tax @9% for SAC 9981 (Research and development services). Therefore, research and developmental activities conducted by an institute / university is a supply of service, classifiable under SAC 9981.

 

IS THERE ANY EXEMPTION TO SUCH INSTITUTES:

  1. There is no exemption in respect of supply of services from 01.07.2017 to 12.10.2017.
  2. However, 13.10.2017 onwards, there is an exemption on the supply of services by a Government Entity to Central Government, State Government, Union territory, local authority or any person specified by Central Government, State Government, Union territory or local authority against consideration received from Central Government, State Government, Union Territory or local authority, in the FORM OF GRANTS vide S .No 9 C of the Notification No.12/2017-Central Tax (Rate), dated the 28th June, 2017 as amended by Notification No.32/2017-CentralTax (Rate), dated 13.10.2017 which reads as under:
(1) (2) (3) (4) (5)
“9C Chapter 99 Supply of service by a Government Entity to Central Government, State Government, Union territory, local authority or    any    person    specified    by    Central Government, State Government, Union territory or local authority against consideration received from Central Government, State Government, Union territory or local authority, in the form of grants. Nil Nil”

 

 

  1. Thus, 13.10.2017 onwards, subject to following three conditions, the exemption provided at Sl.No.9C of the Notification No.12/2017 – Central Tax (Rate) dated 28.06.2017 as amended by Notification No.32/2017-CentralTax (Rate), dated 13.10.2017 is available, i.e.:

  • the supplier of service is a government entity;

  • the recipient of service is Central Government, State Government, Union territory or local authority, or any person specified by Central Government, State Government, Union territory or local authority; and

  • the consideration is received from Central Government, State Government, Union territory or local authority, in the form of grants.

  1. Further, “Government Entity” is defined in clause (zfa) of paragraph 2 of said Notification as “an authority or a board or any other body including a society, trust, corporation, (i) set up by an Act of Parliament or State Legislature; or (ii) established by any Government, with 90 per cent. or more participation by way of equity or control, to carry out a function entrusted by the Central Government, State Government, Union Territory or a local authority.”
  2. Section 2(53) of CGST Act defines “Government”means the Central Government;
  3. Against this backdrop, the claims of the IITs and Universities, being exempted needs to be looked into. So, from 13.10.2017, not only the subsidy was not forming part of consideration but also grant stand exempted, subject to further conditions. In other words, the question of any interpretation loses its relevance as the difference between grants and subsidy was no longer relevant factor to decide about the taxability.
  4. IIT Delhi is established by an act of Parliament, hence Government entity as per Notification No.12/2017 – Central Tax (Rate) dated 28.06.2017 as amended. Therefore, services provided by it to Central Government, State Government, Union territory, local authority or    any    person    specified    by    Central Government, State Government, Union territory or local authority against consideration received from Central    Government, State Government, Union territory or local authority, in the form of grants are exempt w.e.f. 13.10.2017. Though, there is no such exemption prior to 13.10.2017. Also, there does not appear any exemption on services supplied to PSUs/Govt. entities, Government Companies like CSIR, ICMR, SERB, etc.
  5. Universities/Institutes providing R&D services to DRDO, NHAI, CSIR, ICMR, SERB and such other Government or Private establishments against consideration received in the form of grants from such entities do not qualify for exemption, in as much as:

  • the recipient of service does not qualify as Government (Central/State/UT) or local authority or any person specified by Government (Central/State/UT) or local authority; and

  • the person who made payment or on whose behalf the payment was made, does not qualify as Government (Central/State/UT) or local authority.

  • supplier of service i.e. the institute / university, is not a government entity.

IS THERE ANY FRAUD OR WILFUL MISSTATEMENT OR SUPPRESSION OF FACTS:

  1. In the facts and circumstances of the issue at hand, it will not be easy to prove the fraud or wilful misstatement or suppression of facts on part of IITs, Universities or such Institutes. However, burden also lies on these Institutes to come clean as they were discharging due GST on such services provided to private person and were well aware of the situations.

CONCLUSION:

  1. As the law stand today GST is liable to be paid by those IITs/Universities, public institutes, providing R and D services to private establishments or government establishments, which do not fulfil three conditions of the relevant notification. Unless these three conditions mentioned in notification, 12/2017-CT(R) dated 28.06.2017 as amended are fulfilled the benefit of exemption notification cannot be granted. It may also be mentioned that if the government wants to exempt these entities engaged in providing research and development activities, it can exempt so unequivocally. Till such time the prevalent law prescribes the leviability to GST. In the end, though it can be said that this issue in all likelihood will land in the Apex Court for final decision. And, DGGI’s umbrella will keep expanding.

 

DISCLAIMER:  The views and opinions expressed in this article are solely those of the authors and do not necessarily reflect the official policy or position of any other individual, organization, employer or Firm. The information provided in this article is accurate and true to the best of the author’s knowledge, but there may be omissions, errors, or mistakes. The authors shall not be liable for any damages, losses, or injuries arising from the use of or reliance on the information presented in this article. Readers are advised to verify any information provided here and to consult with appropriate professionals for specific advice tailored to their individual circumstances.

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