Where It All Goes Down
Since there's no real setting here, we're going to get abstract. So, how about this? The setting is… your mind. Perhaps you weren't expecting that?
This isn't just playing off Blake's reputation as a far-out seer. The basic realization Blake is trying to get his readers to have—to "see a world in a grain of sand"—has to happen in the mind. Almost all of the couplets are geared towards producing this revelation, showing how a small example of something can contain the truth about the whole. But, after stating this plainly at the beginning, Blake leaves his readers to connect the dots throughout the rest of the poem.
At the end, when he reaches the big spiritual epiphany—where God appears as a fellow human being to "those who dwell in realms of day" (132)—Blake is bringing home the ultimate vision that he has and that he wants everyone else to be able to have. For Blake, everything is part of God, but in a higher spiritual way. The suffering animals and suffering humans in the poem (and the humans who are causing the suffering) are all part of this "Human Form Divine" who appears to people in "realms of day" (eternity or heaven).
This is really the epiphany that Blake wants to inspire in his readers—to see all human and non-human forms as part of one Divine Being. And the mind is the setting where that epiphany is supposed to happen. Dig it.