Tax terrorism? A storm brewing in India’s academic circles can't be taken for granted

Sep 9, 2024

Synopsis
Seven top Indian institutions, including IIT Delhi and Anna University, have received showcause notices from the Directorate General of GST Intelligence for unpaid taxes on research grants since 2017. This has sparked a debate within the academic community, with some calling it 'tax terrorism.' Legal experts urge the Centre to reconsider before the matter reaches courts.

Seven prominent Indian institutions, including the prestigious IIT Delhi and Anna University in Chennai, are facing a significant financial challenge: they have received showcause notices from the Directorate General of GST Intelligence (DGGI) for unpaid taxes on research grants given since 2017. This move has sparked a major debate within the academic community, with some calling it "tax terrorism", ToI reported.

The DGGI's stance is that research and development grants received by educational institutions are not exempt from taxes, but many academicians, scientists, and funding agencies argue otherwise, noting that such grants are typically hard to secure and are often tax-exempt in other countries.

Institutions like IIT Delhi have been asked to pay ₹120 crore, including penalties, over the past seven years. Others are facing demands ranging from ₹5 crore to ₹60 crore. Infosys co-founder T V Mohandas Pai voiced his discontent on social media, tagging GST India and PM Modi, calling the situation “tax terrorism.”

“GST on research grants will reduce money allocated for research. So, the govt must remove GST,” said Kris Gopalakrishnan, another Infosys co-founder who is a strong advocate for education and funds research projects in institutions like IIT and Indian Institute of Science (IISc). ToI said, according to experts, research inherently involves risks, and without the burden of taxes, institutions are more likely to invest in innovative, high-risk projects potentially leading to groundbreaking discoveries. They argue that some significant research studies span several years.

Orthopaedic surgeon Dr George Thomas, former editor of the Journal of Indian Medical Ethics, emphasized the importance of long-term investments in research. “The Framingham Heart Study, for instance, is a long-term, ongoing cardiovascular cohort study of residents of Massachusetts that began in 1948,” he said. “The National Institutes of Health invested USD 14 million in the Lower Extremities Assessment Project (LEAP), a comprehensive research initiative designed to evaluate and improve outcomes in patients with severe injuries of the legs. Without large investments, breakthrough research is difficult. Taxing research grants reduces the already low investments.”

Researchers also pointed out that funds for research have not increased in line with inflation, while the scope of research has expanded. Scientist Ashok Jhunjhunwala, who has chaired government committees and boards of institutions like IIT, suggests that GST on research grants could be absorbed by the grantee. “When researchers receive grant money from the ministry, the govt 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,” he explained.

Research grants are typically itemized with specific amounts allocated for equipment, components, travel, salaries, and overheads. “Where is the GST money supposed to come from within this? Placing a GST demand on research institutions is just harassment,” Jhunjhunwala further elaborated. Several universities are now preparing for litigation against the GST demand, but legal experts are urging the Centre to reconsider before the matter reaches the courts.

“GST is levied on the supply of goods and services,” stated K Vaitheeswaran, an advocate and tax expert heading the taxation committee of the Madras Chamber of Commerce and Industry. “For example, at a shop there is a tax on sold goods. GST is on the supply of goods or services for consideration. When a university receives a research grant, there is no quid pro quo to provide any goods or services. A grant is not a consideration; it is akin to a donation.”

Legal experts argue that research outcomes are uncertain and may not always result in saleable goods or services. Therefore, research grants and donations, whether from government or private agencies, should not be taxed based on anticipated outcomes but on actual monetized results. They further noted, “When income tax provides an accelerated tax shield for research institutions notified under section 35(1)(ii), GST too should extend the same reasoning and logic for research grants.”

Delhi Minister Atishi expressed her opposition to GST on research grants and other services during a GST Council meeting. “Show cause notices have been sent to big educational institutes including IIT Delhi and Punjab University. It is wrong. Research is an investment in development of the country. There shouldn't be a GST on research grants. On one hand, the Centre is decreasing the research grants and on the other, they are levying GST. We will oppose it,” she said. She also noted concerns about GST potentially being levied on online payments via gateways, which could burden startups.

Academicians are hopeful that this issue will be discussed at the GST Council meeting on September 9, chaired by Union Finance Minister Nirmala Sitharaman. “Research grants to universities must be considered a subsidy as funds are used solely for delivering public good without any profit motive, making it a quasi-government endeavour by the university,” said one academician.

T V Mohandas Pai suggested setting up an expert committee within GST India akin to the one at the Institute of Chartered Accountants of India. “Questions should be referred to this committee, position paper prepared, put out for public comments and after that issued as the official view,” he recommended. “This will ensure uniform policy throughout the industry and eliminate arbitrary action by GST officers which harm the country and business as well as reduce tax terrorism. Officials must raise contestable questions and debate it out before they issue such notices. Tax on research grants given to universities can have a chilling effect on research outputs. I hope it’s axed.”

(With ToI inputs)

[The Economic Times]