Children who spend lot of time with grandparents, suffer from Grandma-itis. This is a condition were they become incapable of doing things for themselves and a little bratty. Yes, lot of Grandma's step up but it not often work out.

Going to grandma become routine and not something look forward to. Grandma can feel little resentful over time because she feel she raised her family and now doing again and with best intention, grandma not have same boundaries and expectation have with other day care child.

It is allowed - as long as your child included in ratio. If you paying for her place, then grandma can at least claim business cost relating to your child. If grandma is doing for free, then she not able claim business expenses on child who not bringing in income. Can't pay tax on 4 and slip in expense from 5 children.

I would tell her that you value special relationship between grandchildren and grandparent. You thank for her offer but you want child to see time at grandma's as special time where she get undivided attention of grandparent rather than it being routine daily event where she share special grandma with other children too. That you prefer keep business and family arrangement separate. It easier to address issue with child care provider if paying for service and only have professional relationship vs enforce your parenting decision on family who you feel endebted to.
Because you value her input as your parent and grandmother of your child, you want protect that as primary relationship and so you feel it in best interest to decline kind offer.