Library / Goods and Services Tax: The Professional's Master Guide

52. Case Study 8: Startup Incubator as a Section 8 Company

52.1 Facts

Pratham Innovation Foundation is a company registered under section 8 of the Companies Act, 2013, located on a university campus in Ahmedabad, Gujarat, with a small office in Bengaluru. It runs Government-funded incubation programmes, takes CSR money for a seed fund and earns fees. Receipts for FY 2026-27 (Gujarat office) are expected to be:

Receipt	Amount (Rs.)	GST position
Grant from a Central Government scheme for incubation	2,00,00,000	Not a supply
CSR contributions from companies	80,00,000	Not a supply
Incubation fees from startups	40,00,000	Taxable, 18%
Co-working seat rent	30,00,000	Taxable, 18%
Sponsorship for demo day by a company	10,00,000	Taxable, reverse charge on sponsor
Interest on fixed deposits	6,00,000	Exempt, outside the rule 42 ratio

52.2 Issues

Which receipts are consideration for a supply.
Reverse charge on sponsorship and on legal fees.
Credit apportionment where part of the work is grant-funded and not a supply.
Registration in Karnataka and the Input Service Distributor.

52.3 Analysis and computation

Grants. A grant is consideration only if the grantor gets a supply in return. Where the Government funds a programme for public benefit and receives no service for its own use, the grant is not consideration. Advance rulings have differed where the sanction lists deliverables for the Government's own use, so the sanction letter must be read clause by clause. The Government subsidy exclusion in section 15(2)(e) confirms that such grants are not added to the value of other supplies. Seed grants passed on to startups are not supplies by the incubator.

CSR funds. A CBIC circular of 2019 clarified that a donation to a charitable body is not taxable where there is no quid pro quo, even if the donor's name is acknowledged. If the CSR agreement gives the donor advertising or naming rights, that part is a taxable service.

Fees and rent. Incubation and co-working are business services at 18%. The charitable activities exemption covers listed activities such as health care and specified education; incubation is not on the list, so section 8 status does not help.

Sponsorship. Sponsorship services to a body corporate or firm are taxed under reverse charge. The sponsor pays 18% on Rs. 10,00,000; Pratham charges no GST. But section 17(3) treats supplies on which the recipient pays tax under reverse charge as exempt supplies for credit reversal. Interest on deposits is excluded from exempt value by the explanation to rule 43; this working also leaves it out of total turnover, the safer course because it gives a slightly higher reversal.

Legal fees. Rs. 3,00,000 paid to an advocate: Pratham's turnover is above the exemption limit, so it pays CGST Rs. 27,000 and SGST Rs. 27,000 under reverse charge and includes the credit in the common pool.

Illustration 217: Credit apportionment for the year (annual figures)

Step 1: T1 (grant-funded programme costs where the GST is itself paid out of the grant): Rs. 2,00,000. Not claimed; claiming it would recover the same tax twice.

Step 2: T3 (food at events, blocked): Rs. 30,000. T4 (co-working fit-out repairs, internet): Rs. 3,00,000. C2 (rent, security, audit, software, legal RCM): Rs. 4,40,000.

Step 3: F = taxable 70,00,000 + sponsorship 10,00,000 = Rs. 80,00,000. E = sponsorship Rs. 10,00,000. Grants and CSR are not supplies and stay out of both.

Step 4: D1 = 4,40,000 x 10,00,000 / 80,00,000 = Rs. 55,000. D2 for non-business use (grant-funded free support) = 5% of C2 = Rs. 22,000.

Step 5: C3 = 4,40,000 less 55,000 less 22,000 = Rs. 3,63,000. Eligible ITC = T4 + C3 = Rs. 6,63,000. Not eligible = Rs. 3,07,000 out of Rs. 9,70,000.

Output tax on fees and rent: 70,00,000 x 18%	Rs. 12,60,000
Less: eligible ITC	Rs. 6,63,000
Net output tax in cash	Rs. 5,97,000
Reverse charge on legal fees, in cash	Rs. 54,000
Total cash for the year	Rs. 6,51,000

Whether the flat 5% for non-business use is enough where the grant-funded work is large is a matter of judgment. A higher reversal based on actual cost share is the safer course where the programme is a large part of the activity.

Illustration 218: Input Service Distributor for the two offices

Step 1: Pratham supplies co-working seats from Bengaluru, so it is registered in Karnataka. Audit and software are billed to Ahmedabad but used by both offices. From 1 April 2025, such common input services must be distributed through an ISD registration.

Step 2: Common ITC in a quarter: CGST 90,000 + SGST 90,000 = Rs. 1,80,000. Ratio of turnover in the preceding year: Gujarat 80%, Karnataka 20%.

Step 3: Gujarat receives Rs. 1,44,000 as CGST 72,000 and SGST 72,000. Karnataka receives Rs. 36,000 as IGST.

Step 4: The ISD files GSTR-6 by the 13th of the following month and issues ISD invoices.

52.4 Compliance and documentation

Monthly GSTR-1 and GSTR-3B for both States; ISD return GSTR-6 monthly.
Sponsorship shown in GSTR-1 as a supply on which the recipient pays tax, and included in exempt value for rule 42.
Grant and CSR agreements on file with a short note on why each is not a supply.
Grant utilisation certificates should show GST either as a cost (credit not claimed) or net of credit, consistently with the GST returns.

Key point

Lessons

Read every grant and CSR agreement for deliverables to the funder. That clause decides the GST position.

Sponsorship under reverse charge still reduces the incubator's own credit through the rule 42 ratio.

Do not claim credit on costs already met by a grant that funds the GST component.

Chapter summary

• Government grants and pure CSR donations are generally not consideration for a supply.

• Incubation fees and co-working rent are taxable at 18%; section 8 status gives no exemption.

• Sponsorship is taxed on the sponsor but enters the exempt value; eligible credit is Rs. 6,63,000.

• Common services used by both State offices go through an ISD registration.