Grants in Aid: Navigating the GST Perspective

In laymans terms, a grant in aid (hereinafter also referred to as “grant”) is characterised as an inflow of money either from a government or a charitable organisation. However, from a tax standpoint, the taxability of a grant is dependent on various indicators. In this write-up, an attempt is made to understand the nuances of the taxability of the receipt of a grant-in-aid from a GST perspective.

Nature of a grant and subsidy

In a technical sense, the term “grant” is understood as a formal transfer, conferment, or bestowal of a right, interest, privilege, benefit, or property by one person or authority to another, through an express act or instrument, and typically supported by terms and conditions governing its use or enjoyment. For example, the UN providing a fund of $ 10 million to Africa for arranging food is a grant given for the benefit of the general public.

In contrast, a subsidy is directly linked to the price of a supply, and it is understood as a financial contribution or support which is aimed at reducing the price of goods or services. Subsidies are often used to ensure that the general public can afford necessities such as food, housing and medical support at low/nominal cost.

Difference between a grant and a subsidy

The concept of a grant differs from a subsidy to a great extent. In this regard, indicators that the payment may qualify as a price-linked subsidy and not a grant are[1]:

• Subsidy is something wherein the payment must be made in return for specific goods and/or services.

• This payment has a direct effect on price or quantity in a way that the goods or services could not at all be provided at that price unless there was a subsidy.

• The intent behind the subsidy is to promote the supply of the particular goods or services.

• There is an arithmetical relationship between the progression of the amount of the payment, the quantity produced and the progression of the actual price of the goods or services provided.

• The price of the goods or services is ascertainable and determined not later than the time of the payment to demonstrate that the consumer benefited from a particular amount being paid.

Based on the above discussion, it follows that the subsidies are conceptually different from grants. In light of this, the taxability of subsidies and grants is discussed below:

Taxability under GST

A subsidy forms part of the taxable consideration received by the supplier if it is directly linked to reducing the price to the customer. This is the case when a payment is made to the supplier by a third party, and it constitutes a consideration or part of the consideration for a supply of goods or services. [Section 15(2)(e) of the CGST Act, 2017]

Whereas, from a general perspective, a grant in aid could ordinarily not be construed as a consideration for an activity. However, when the agreements, the terms and conditions and other facts reveal that the arrangement is not that of a grant, but it is of a supply disguised as a grant, then it could be construed that the grant is a consideration for an activity.

Consequently, it becomes paramount to understand when the grant in aid is disguised as a consideration for a supply. For this purpose, over a period of time, various indicators have been identified to distinguish an activity carried out for consideration and an activity carried out in exchange for a grant-in-aid[2].

However, a single indicator is not determinative of the presence of an 'activity for a consideration'[3]. Thus, where a majority of indicators of supply are present, the grant may be construed as consideration for a supply and would therefore be taxable.

In light of the above, the different categories of indicators that help in determining whether a grant is a consideration for an activity are discussed in the following paragraphs.

Category I - Indicators concerning the nature of supply

If the activity performed with the grant money is conducted with the intent to earn profit, or for commercial exploitation, then the grant would be considered a supply made for consideration. This can be ascertained by the following factors:

• If the activity is undertaken as an economic activity which has the potential for generating profit, then the grant would be construed as consideration for a supply.

• If the objective of the funder is to gain specific results or deliverables, which could be commercially exploited, then the grant may be a consideration for a supply.

Category II - The presence of a counter obligation would indicate a supply

If the terms of the grant sanction letter constitute a contractual obligation, then the activity may be construed as a supply made for consideration.An indicative list of indicators which can help to ascertain the presence of counter obligation is as follows;

• While grants may sometimes follow a proposal-based process, the presence of a procurement-style process, such as an RFP coupled with contractual deliverables, may indicate that the funder is procuring services rather than providing a grant

• If each activity carried out by the fundee gives rise to a specific and identifiable payment, then it is a supply for consideration

• Is there a penalty clause in place if the fundee does not fulfil its responsibilities? If yes, then it is a supply for consideration

• If the funder has initiated the agreement for seeking services in return, and if the funder is the direct beneficiary of the services or an identified third party is the direct beneficiary of the services, i.e. if the funder believes they are receiving something in return for the payment, then the grant is a consideration for a supply.

• Conversely, if a fundee is under no obligation to carry out a particular activity in exchange for the grant, then the grant would not be construed as a consideration for a supply[4]

• If the grant is given with a counter obligation to provide IPR rights on the outcome, then the grant is a consideration for a supply[5]

• If the funder carries out its own charitable aims and objectives with the assistance of the money which is given with no expectation of direct benefit in return, then it could be construed as a grant

• If the fundee sets its own targets as opposed to the funder imposing specific targets, then the amount qualifies as a grant

• If it is a grant, then the relationship between the funder and fundee will have a clear level of control from the funder in the fundee's decision-making process

• If the payments are treated as trading income or expenditure in the accounts of either party, then it may be a supply for consideration

It is noteworthy that grant proposals, contracts or sanction letters containing activities, project duration, budget costs, etc., are primary indicators to determine whether the funding qualifies as a grant or a consideration for a service. Such documents should be understood to ascertain the following:

• Whether there is a contract, and if yes, then what do the terms and conditions indicate?

• Grants given based on a proposal containing activities, project duration, budget costs, etc., are not a consideration for any supplies

• Conditions relating to utilisation of grants, regular monitoring requirements, submission of utilisation certificates, etc., do not make the grant a consideration for a supply[6]

• Are there any conditions attached to the payment that go beyond merely having to mention it in account statements? If yes, then a grant may be a consideration for a supply

• If the funder attempts to control how the money is spent, maybe imposing specific targets in terms of quantity, quality, timeframes, etc., then it cannot be construed as a grant.

Additionally, if funding is drawn as a reimbursement of expenditure incurred, rather than an advance payment for services, or if there is a 'deficit funding' arrangement whereby the funder agrees to plug any funding gaps, then the amount qualifies as a grant.

Moreover, when an organisation identifies a need it wishes to fulfil and decides not to do so itself, it may agree with another body to undertake the task, and fund that body's costs through a grant or subsidy; in this case, the grant would not be construed as a consideration for a supply.

Category III - Control over money

If the fundee has a right to claim compensation if the grant is not received properly or if the funder does not have a right to take back the unutilized money, then there may be a supply made for consideration.

Category IV - Reasons behind the grant

If the grant is provided pursuant to the statutory powers or obligations of the funder after following the grant application process run by an organization that regularly provides grants, such as central or local government then, there may not be a supply made for a consideration i.e. a government department normally does so under its statutory obligations and so it must have a legal power to do so.

The Essence of the Discussion

In practice, most disputes arise not from the nature of the funding but from poorly drafted grant agreements. Where the agreement creates measurable deliverables, milestone-based payments, or rights in the output of the activity, tax authorities are more likely to view the grant as consideration for a supply.

Thus, taxability of the grant depends on various indicators, but the bottom line stays the same, i.e. whether the grant is a consideration for a supply in disguise? If yes, then GST is leviable, and if no, then GST is not leviable.

[1]HMRC, Internal Manual on GST - supply and consideration, GOV.UK, accessed 07.12.2025, https://www.gov.uk/hmrc-internal-manuals/GST-supply-and consideration/GSTsc06311

[2] HMRC, Internal Manual on GST - supply and consideration

[3]Central Excise and Service Tax Tribunal, [Order issued in Service Tax Appeal No. 30082 of 2020], International Institute of Information Technology vs the Commissioner Central Tax Rangareddy - GST, Telangana, Final Order Nos. A/30247-30248 of 2024 in Appeal Nos. ST/30082 of 2020 and ST/30009/2021, decided on 8-4-2024

[4]Central Board of Excise and Customs, “Taxation of Services: An Education Guide”, CBIC, last accessed on 08 December 2025, blob:https://www.cbic.gov.in/8e527b7a-58dd-4018-aecc-f53ca155cc99

[5]CBIC, “Taxation of Services: An Education Guide”

[6]CBIC, “Taxation of Services: An Education Guide