The recent wave of Show Cause Notices (“SCNs”) issued by the Directorate General of Goods and Services Tax Intelligence (“DGGI”) to several of the nation’s most prestigious educational institutions on research grants received, has sent shock waves in this sector. This is particularly concerning because these sectors, which may otherwise be availing GST exemptions, would be caught in the tax net if such grants are determined to be taxable. The potential taxability of such grants could also adversely impact the funds allocated to these institutions.

From a legal standpoint, the conundrum surrounding the taxation of grants and donations received by educational or charitable institutions has been a contentious issue even before the advent of the GST regime. Under the erstwhile Service Tax regime, an activity was taxable only when it was performed in exchange for a ‘consideration’. In other words, grants given for research where the researcher is under no obligation to carry out a particular research would not be a consideration for such research. However, the existence of a counter-obligation on the researcher, such as the grantor’s acquisition of intellectual property rights over the research conducted was sufficient to qualify the grant as a ‘consideration’ for provision of a taxable service. Conversely, general research grants, which did not impose any reciprocal obligations beyond proper usage of funds and furnishing of accounts, were not treated as ‘consideration’.