ICDS VII : Government Grants - Income Tax - Ready Reckoner - Income Tax

ICDS VII : GOVERNMENT GRANTS Government assistance received in any form (cash or kind) bearing any nomenclature (subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement) would, be treated as income . This ICDS outlines income computation and disclosure aspects relating to grants or assistance received from Government agencies and similar bodies. The ICDS is applicable only in case of income computed under the head Profits and gains from business or profession and Income from other sources . The ICDS therefore excludes any receipts or grants from Government which may be chargeable to tax under other heads. It would also exclude Government grants received or receivable by Charitable trusts (which are governed by sections 11 to 13) . 1. Scope:- This ICDS deals with income-tax treatment of Government grant. The Government grants are sometimes called by other names such as subsidies, cash incentives, duty drawbacks, waiver, concessions, reimbursements, etc. The ICDS excludes the following two forms of government aids: Government assistance other than in the form of Government grants; and Government participation in ownership of an enterprise. The term Government is defined to mean Central or State government including forms and organs of the government, be it national, provincial, municipal etc. The definition covers government agencies and other entities vested with and exercising governmental authority. The essence of including agencies and similar bodies is to include those entities or departments which enjoy the power to regulate, control, supervise or restrain public conduct through exercise of lawful authority. Government grants : These are assistance by government in cash or kind to an enterprise for past or future compliance with certain conditions. The grant involves transfer of an asset (cash or kind) from Government to the beneficiary. This can take many forms varying both in the nature of the resources transferred and in the conditions attached. These conditions may also include negative restrictions. The ICDS excludes assistance whose value cannot be ascertained. In other words, although the grant is a valuable one, such grants cannot be translated into precise numbers. Examples of assistance that cannot reasonably have a value placed upon them are free technical or marketing advice orprovision of guarantees by the government. Interest free debt or concessional loaning is a form of government assistance, benefit of which cannot be quantified by the imputation of notional interest. 2. Recognition of Government Grants:- ICDS states that a reasonable assurance should be the cause for recognizing grants. Government grants should not be recognised until there is reasonable assurance that (i) the person shall comply with the conditions attached to them, and (ii) the grants shall be received. Both the conditions have to be cumulatively satisfied to recognise the government grant as income. The phrase reasonable assurance has also not been defined by the ICDS. It connotes something which has a sufficient degree of certainty. Recognition of Government grant shall not be postponed beyond the date of actual receipt. The Government grant has to be recognised on or before the date of receipt. Asset specific grants: Grants related to assets are government grants whose primary condition is that an entity qualifying for them should purchase, construct or otherwise acquire long-term assets. Subsidiary conditions may also be attached restricting the type or location of the assets or the periods during which they are to be acquired or held. Grants related to income/ loss: These are grants other than the asset specific grants. These could be grants relating to monetary support provided to enterprises or could assume the form of expense/ loss compensation. 3. Treatment of Government grants:- (a) Where the Government grant 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. Grants are sometimes received as part of financial or fiscal aids to which a number of conditions are attached. In such cases, costs and expenses incurred for meeting the attached conditions determine the periods over which the grant will be recognised. The grant is allocated over the period during which such costs are charged to income. (b) Where the Government grant relates to a non-depreciable asset or assets of a person requiring fulfillment of certain obligations, the grant shall be recognised as income over the same period over which the cost of meeting such obligations is charged to income. (c) Where the Government grant is of such a nature that it cannot be directly relatable to the asset acquired (whether depreciable or not): In case one-to-one nexus cannot be established between government grant and assets, the same proportion as such asset bears to all the assets in respect of or with reference to which the Government grant is so received, shall be deducted from the actual cost or written down value of the asset. Thus, where a government grant is not directly relatable to depreciable fixed asset acquired, the total grant has to be apportioned over the various assets to reduce their cost proportionately. The amount to be reduced from the actual cost or written down value can be computed in the following manner: Amount to be reduced from actual cost/ written down value = (A x B)/C Where A = Value of the asset acquired; B = Total government grant received or receivable; and C = Sum of all assets in respect of or with reference to which Government grant is received. The same treatment is applicable in case of non-depreciable assets as well. (d) The Government grant that is receivable as compensation in relation to (i) expenses incurred in a previous financial year; or (ii) losses incurred in a previous financial year or (iii) giving immediate financial support to the person with no further related costs. In the event of occurrence of any of these three events, grants shall be recognised as income of the period in which it is receivable. Actual receipt of compensation is irrelevant for the purpose of income recognition. It is also not relevant whether such expenditure or loss was incurred in relation to assets (damage of assets - whether depreciable or otherwise) or in the normal course of business (eg: loss of stock-in-trade). This para deals with expenses or losses (irrespective of its characterization) incurred in a previous financial year for which compensation is receivable from the Government. (e) The Government grants other than covered by paragraphs 5, 6, 7, and 8 of ICDS VII shall be recognised as income over the periods necessary to match them with the related costs which they are intended to compensate. (f) The Government grants in the form of non-monetary assets, given at a concessional rate, shall be accounted for on the basis of their acquisition cost. For example , a government body may grant lands to an assessee at a price which is lower than market value. However, it grants such land at the same price to all its grantees. In such an eventuality, the grant of such land is not an income in the hands of the allottees. The allottees should not look at the market rate to compute the concession but the price at which such lands are granted by the body in its normal course. 4. Refund of Government Grants:- (a) Government grants sometimes become refundable because the attached conditions are not fulfilled. Refund of government grants would require reversal of treatment carried out at the time of its initial recognition. The ICDS requires that in the event of reversal of government grant, it has to be first applied to unamortized deferred credit. If the amount so refundable exceeds any such deferred credit, or where no deferred credit exists, the amount is charged to profit and loss statement. Refund of such grants shall be given the following treatment while computing taxable income: (i) Situation: If balance exists in deferred credit Refund - Tax Treatment: Step I: Reverse the unamortized deferred government grant a/c against refundable grant Step II: Balance (Grant refundable unamortized grant) should be charged to Profit and loss account or should be claimed as a deduction from business income Consequence: Excess of refundable grants over the unamortized deferred grant is claimed as a deduction in the total income computation. Effectively, amount which was earlier recognised as income is claimed as an allowable expenditure in the year of refund. (ii) Situation: If no balance exists in deferred credit [or if the grant wholly recognised as income in the year of initial recognition] Refund - Tax Treatment: The whole of grant refundable should be charged to Profit and loss account or claimed as a deduction from business income. Consequence: Amount which was earlier recognised as income is claimed as an allowable expenditure in the year of refund. (b) Grants in relation to depreciable assets are required to be reduced from the actual cost of the asset or written down value of block of assets which houses the concerned asset. This is the mandate of paras 5 and 7 of this ICDS. In the year such grant is refunded: the carrying amount of the depreciable asset is increased by the grant refundable; and Depreciation is claimed on the increased carrying amount over the remaining useful life of the asset prospectively. (c) The ICDS does not prescribe the treatment of refund for grants in relation to the following: Grants which are not directly relatable to acquisition of non-depreciable assets; and Grants in relation to non-monetary assets. 5. Transitional Provisions:- All the Government grants which meet the recognition criteria of para 4 on or after 1st day of April, 2016 shall be recognised for the previous year commencing on or after 1st day of April, 2016 in accordance with the provisions of this standard after taking into account the amount, if any, of the said Government grant recognised for any previous year ending on or before 31st day of March, 2016. 6. Disclosures:- Broadly, there are two variants of grants deliberated in this ICDS. One which requires to be reduced from actual cost or written down value of asset and other which requires recognition of grants as income for a year. The ICDS requires disclosure in respect of both these grants to the extent recognised (and not recognised) during the year. The following disclosures are therefore prescribed: Nature of grant Amount recognised Remarks/ Reason Government grants recognised during the previous year by way of deduction from the actual cost of the asset or assets or from the written down value of block of assets during the previous year Government grants not recognised during the previous year by way of deduction from the actual cost of the asset or assets or from the written down value of block of assets Government grants recognised during the previous year as income Government grants not recognised during the previous year as income