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Govt Subsidy

CA Sandeep Kumar (Audit Assistant) (804 Points)

08 December 2010

Dear members, here is my query, basically it is an accounts question, but tax component is included, i have posted here too, members can answer both also.. thanks..

Actual cost of capital asset- 1.75 cr

Govt subsidy received - 25 lakhs

PLease give the treatment w.r.t AS 6,10,12

on what amount depreciation will be calculated, is it 1.75 cr or 1.5 cr (1.75cr - 25lakhs)

Also, what is the Income tax treatment of 25lakhs received from govt..

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5 Replies

tarak nath shaw (Audit Clerks) (45 Points)
Replied 08 December 2010

For Taxation point of view:

Explaination 10 to Sec 43(1): Actual cost will be after deducting Govt. Subsidy. & added to Bolck according as per Sec43(6), After claim Depreciation as per Sec. -32.

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CA Mohit Agrawal (Chartered Accountant) (371 Points)
Replied 08 December 2010

Dear friend as much i know as per accounting standards you can charge depr on any .i.e either you can charge depr on 1.5cr and the depr amount will be tranf. to p&l a/c and if you are charging depr on 1.75cr than you will trf the depr amount on 1.5cr to P&L a.c and balance to subsidy amout that is shown in balance sheet ,but depr on 1.5cr is preferred because as per IT Act also you will be allowed depr on 1.5cr only. you can confirm this from others.

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Bala (Student) (498 Points)
Replied 08 December 2010

Option I

Deduct the subsidy from the asset cost and claim depreciation on the balance.

Option II

Claim Dep on the full cost and credit the amt of grant over the useful life of the asset.

Net effect on P& L in both options will be the same.

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CA Deepesh Ruhela (Keen to Learn) (3271 Points)
Replied 08 December 2010

As per AS12, there is two method for accounting of Govt grant/subsidy:

1. Additive/gross method :- Claim Dep on the full cost and credit the amt of grant over the useful life of the asset.Net effect on P& L in both options will be the same.

2. Deductive/net method :- Deduct the subsidy from the asset cost and claim depreciation on the balance.

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kanagaraj (CHARTERED ACCOUNTANT) (793 Points)
Replied 09 December 2010

Dear,

The capital subsidy is to be deducted from the cost of machinery for depreciaiton purpose. The capital subsidy received may be kept under reserves account or under capital account so that the capital may be increased. This will be useful in case when we go for bank loan

regards

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