Taxability of Government Grants - An Analysis

Through this article, I have made an effort to give clarity on taxability or otherwise of government grants based on the law prevailing as of now.

DEFINITION OF INCOME:

If we see the definition of income, it has a specific inclusion of subsidy or grant. As per section 2(24)(xviii) income includes “assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name called) by the Central Government or a State Government or any authority or body or agency in cash or kind to the assessee other than

• the subsidy or grant or reimbursement which is taken into account for determination of the actual cost of the asset in accordance with the provisions of Explanation 10 to clause (1) of section 43; or
• the subsidy or grant by the Central Government for the purpose of the corpus of a trust or institution established by the Central Government or a State Government, as the case may be;”

APPLICABLE ICDSs:

We know that Central Government had notified ten income computation and disclosure standards (ICDSs) vide notification dated 31.03.2015 which are to be followed by all assessees, following mercantile  system of accounting, for the purpose of computation of income chargeable to income tax under the head “Profit and gains of business or profession” or “Income from other sources”.

Among the ICDSs, ICDS VII deals with Government Grants. It defines the “Government grants” as assistance by Government in cash or kind to a person for past or future compliance with certain conditions.  However, it does not deal with:

• Government assistance other than in the form of Government grants;
• Government participation in the ownership of the enterprise.

Treatments of Government grants dealt in ICDS VII are as follows;

1. Where the Government grants relates to a depreciable fixed asset or assets of a person, the grant shall be deducted from the actual cost of the asset or assets concerned or from the written down value of block of assets to which concerned asset or assets belonged to.
2. Where the Government grants relates to a non-depreciable asset or assets of a person, the grant shall be recognized as income over the same period over which the cost of meeting such obligations is charged to income.
3. Where the Government grants is not directly relatable to the asset acquired, then pro-rata reduction of the amount of grant should be made in the same proportion as such asset bears to all assets with reference to which the Government grant is so received.
4. Government grants that is receivable as compensation for expenses or losses incurred in a previous financial year or for the purpose of giving immediate financial support to the person with no further related costs, shall be recognized as income of the period in which it is receivable.
5. Government grants other than the above shall be recognized as income over the periods necessary to match them with the related costs which they are intended to compensate.

CONCLUSION:

Based on the combined reading of section 2(24)(xviii) and ICDS VII, we can conclude that, except the exclusions mentioned in the definition of income, Government grants or subsidy by whatever name called are income and hence chargeable to tax in the hands of the assessee, and the treatments of the same has to be determined considering the provisions contained in ICDS VII. 

Disclaimer: This article has been prepared with a view to share the knowledge. Views expressed herein are not necessarily the views of any relevant statutes.  Author is not responsible for the correctness or otherwise of the contents published herein. If any errors or omissions are noticed, the same may be brought to the attention of the author.

The author can also be reached at Koushik.d.c@gmail.com.